By Sam Schafer
Financial Services Officer
If you are in the market for a new home or vacant land loan, you have a number of considerations to make when choosing the right lender. For many buyers, interest rates and loan fees can help to drive the selection process. Understanding how interest rates are calculated and the factors used in determining them may help to comfort you as you make your decision.
Interest rates, usually calculated on an individual basis, are dependent on a number of factors. When applying for a loan, lenders may use a practice known as risk-based pricing to assess a borrower’s repayment ability. Each applicant is assigned a risk “rating” and this is determined, in part, by analyzing his or her credit scores, derogatory credit events, debt-to-income ratios, employment status, and net worth. This information helps the lender to make a reasonable and good faith determination that the customer is able to pay back the loan. These factors may also influence the initial interest rate. Other items that may be considered are the terms and conditions of the loan, down payment commitment and payment frequency. For example, a 15-year mortgage with a 30 percent down payment will very likely have a lower interest rate than a 30-year mortgage with 20 percent down.
To best position yourself for the most favorable rates offered by your lender, pay special attention to your credit report and look for items that may degrade your risk rating. Addressing items like late payments, collection accounts or high credit card balances can help to improve your credit profile.
Borrowers choosing to work with a Farm Credit lender, like GreenStone Farm Credit Services, may see other benefits, in addition to our competitive interest rates and fees. Because Farm Credit associations are cooperatives, each customer is considered a shareholder and, as such, may receive a patronage payout each year based on the overall success of the association. Historically, GreenStone has been a leader in patronage payments among all Farm Credit associations, returning millions back to our shareholders each year, thereby reducing the customers cost of debt or rate of interest paid on an annual basis.
Understanding how each lender you are considering calculates risk can go a long way in helping you find the right fit for you and your family. For more information on how your interest rate may be determined, please contact us at email@example.com.