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| Understand
your interest rate |
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When you apply for a mortgage
loan, the first thing you probably want to know is
what your interest rate will be. Your interest rate will
depend on some things you can control and some things
you cannot control.
David E. Brumbaugh’s article on Woopidoo.com,
titled, “The Three Largest Factors In Your Interest
Rate,” offers some insight and relief by explaining
the major factors that determine why your rate is the
way it is.
The three major factors
that affect your interest rate are; the Federal Reserve
Bank discount rate, your FICO score and credit report
and lender business factors.
Unfortunately, you have little to no control over the
Federal Reserve Bank interest rate. “Banks and other
lending institutions borrow money from the Federal Reserve
Banks. The discount rate is the interest rate a Federal
Reserve Bank charges eligible financial institutions to
borrow funds on a short-term basis. The discount rate
has a direct effect on the ‘Prime Interest Rate,”
which is the interest rate on short-term loans that banks
charge their commercial customers with high credit ratings.”
The credit bureau is the most commonly used type of Credit
Reporting Agency (CRA). CRAs gather and sell information
about where you work and live, how you pay your bills,
and “whether you've been sued, arrested, or filed
for bankruptcy.” Lenders will get your credit report
from the credit bureau when determining your loan interest
rate.
The FICO score is a method of determining the probability
that credit users will pay their bills. It condenses a
borrower’s credit history into a single number.
“You can protect your FICO score and credit report
by paying your bills on time and not over-extending yourself.
You also have the right to have false information removed
from your credit report.”
The final major factor that will affect your interest
rate is compiled into lender business factors. “Banks
and other lenders are in business to make a profit. They
also exist in a competitive market. Like all businesses,
they will balance their profit margin with competitive
factors. If they charge too little, based on your credit
history and the prime rate, they risk going out of business.
If they charge too much, they risk losing you to a competitor.
Therefore, in order to get the best deal you can, you
should shop around.”
One important thing to keep in mind when you are shopping
around for the lowest possible rate is that the number
of times your credit report has been accessed during a
set period of time will affect your FICO score. “Three
or four is typically a safe number. If you request an
on line quote from several lenders, they won't typically
run your credit report until after they have made their
initial quote.”
As a result, you should not allow too many lenders to
access your credit report. Narrow your search via the
Internet or word of mouth before shopping for the best
rate.
“In order to get the best rate you can, you can
do two things; keep up a good credit history by paying
your bills on time, and shopping around for the best rate.” |
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