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Three Things Lenders Consider to Determine a Borrower’s Interest Rate

There are a number of things you should keep in mind when looking to apply for a mortgage. Among the things to consider is the amount you will pay. The affordability of your mortgage will mainly depend on the interest you will have to pay. The interest you will be charged will depend on various factors. Lenders consider the following when coming up with a borrower’s interest rate.

The Borrower’s Risk
To determine how much interest to charge you, lenders have to consider your risk. The interest for a particular amount of mortgage may vary from borrower to borrower. This is because lenders assign different risk levels to all borrowers.

Lenders know that borrowers can default the loans down the road. A borrower may be unable to pay his/her loan due to different reasons. When loans are not paid back, the lenders can undergo huge losses. This explains why lenders categorize borrowers in different risk groups when evaluating their mortgage applications. There are a number of factors that are considered to determine the risk level. Generally, less risky borrowers can be easily approved for mortgages than high risk borrowers. In terms of interest, high risk borrowers are charged higher interest than low risk borrowers.
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Credit Score
Credit score is the other factor that lenders have to consider when determining how much interest to charge borrowers. The credit score is a measure of how likely you are to fulfil your obligations to pay back the loan based on fulfillment of your past obligations. If you are applying for your first credit, your credit history is likely to be zero. When you have a low credit score, this does not mean you are considered a defaulter. When you have been designated a low credit score, this means that you have insufficient history to determine whether or not you are likely to fulfill your loan payment obligations.
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You can get your credit score for free from one of the national credit bureaus. Go through your report and check whether it has any errors before applying for a mortgage loan. Sometimes, your low credit score may be due to incorrect entries made in the report. Get the report corrected before applying for a loan.

Amount of Down payment
Lenders will also consider the amount of down payment you would provide to determine how much interest to charge you. Making a large down payment means reducing the lender’s risk. This means you will be rewarded with low interest.