How Much Does My Interest Rate Affect My Home Loan?
To answer the question, quite a bit.
We know, we know… The topic of interest rates isn’t exactly the most interest-ing thing to talk about, (see what we did there) but we want to keep our readers well informed across the board! The more you know going into this investment, the more prepared you’ll feel when terms and conditions are tossed onto the table.
So, unless you are paying in full with “cash” for your mobile home, this topic is unavoidable, and you will need to understand what an interest rate is, what has the potential to affect your interest rate, and how your interest rate affects your loan. Interest rates play a crucial factor in mobile home loans, but why is that?
Let’s discuss the pieces involved in determining an interest rate, otherwise known as: the price of your loan.
4 Factors to Remember When Determining Interest Rates:
The idea of a credit score should be pretty simple, but things can get complicated if your score takes a hit. Ultimately, your score is a number that reﬂects how trustworthy you have been in repaying loans and consistency in paying bills. Credit scores take all sorts of loans into consideration, from a $25,000 car to a $800 sofa, and even that pesky Target credit card you might have gotten talked into to save 5% on your purchases.
Credit score bureaus not only evaluate the size of the loan, but also the timeliness of payments, recurrent use of loans, and the sum of payments in relation to the minimum payment required. And, contrary to popular belief, having no credit at all is not necessarily better than having bad credit when it comes to getting a loan. Although it is easier to make good credit from no credit than it is good credit from bad. And remember, having not-so-great credit isn’t always the end of the road, for more information, check out our Braustin Academy video on bad credit.
So, what does this have to do with interest rates? Well, it’s important to know that with a low credit score often comes a higher interest rate.
YIKES! Why is that?
Well, when a bank loans out money, they are taking a chance on you as a borrower.
The chance they’re taking is a trust fall that only protects them and guarantees your responsibility if anything falls through or payments get behind. If they see that your past performance hasn’t been meeting up with expectations and must plan for the possibility of foreclosure, which means repossessing the property you bought with your borrowed money. So, in their agreement to lend you money, they include a high interest rate, which helps to ensure they still turn a proﬁt on the loan.
The cost of a manufactured home makes monthly payments affordable, but a negative credit history means the loan is still more expensive than someone with positive credit history.
It is extremely beneﬁcial for you, as a future homebuyer, to begin repairing your credit (if it is bad) or begin building it up (if you do not have any) before applying for a loan. This way your credit is in a better position for a favorable loan, and you have time and documentation on your side of keeping these changes moving in the right direction.
How can you check your score to see where you stand?
You can actually get copies of your credit reports, free of charge, from the three major credit bureaus at freescoreonline.com. You may also be able to see your credit scores for free through your bank or credit card’s online banking platform, just be sure to call and see if they offer that service.
Down payments are a measure of personal investment you have in your property, and reduce the risk of a bank losing money if you fail to pay back the loan.
To help put it into perspective, let’s say someone wanted to buy a home that costs $100,000. They had a bit saved up from a previous investment and were able to put down $40,000 as a down payment for this home. The remaining balance is now only $60,000 and this portion is needed from the bank, which is just a bit over half of the initial cost of the home. The bank sees that the buyer has invested 40% of their own money into this house and if they default on that loan, the buyer is losing almost as much as the bank is. Even in the event of a foreclosure, the bank is highly likely to recoup is money.
Now, that was just an example, it’s not too often that someone has $40,000 to put down on a home. But in this case, they are more likely to offer the buyer a lower interest rate, knowing over time they have a very high chance of paying their loan, and the bank will turn a proﬁt.
Minimum requirements on down payments can ﬂuctuate with the type of purchase, loan amount, and, as mentioned above, credit score. In the case of a mobile home purchase, there are a few ways to ﬁnance. And each option will have different requirements regarding the down payments’ percentage.
A term loan is a monetary loan that is repaid in regular payments over a set window of time. Term loans usually last between 1 and 10 years but may last as long as 30 years in some cases. In the case of home loans, 15, 20, and 30 year loans tend to be the most common, with 20 year loans pretty standard for our customers. The length of the term can affect the amount paid per month. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid.
30-year mortgage: This term length is typically what most borrowers opt for, a loan type which, although keeps monthly payments lower, tends to have higher interest rates and means more money paid out in the long term.
15-year mortgage: This term tends to keep interest rates at the lowest possible, while setting a higher monthly payment in order to pay the loan back in a shorter window of time. Understandably, this option is less appealing than the 30-year mortgage, as many borrowers in the manufactured home or site-built industry would prefer to keep their monthly payments more affordable.
One available option many buyers are unaware of is the ability to reﬁnance their loan. Should the homeowner come into more abundant ﬁnancial times, whether they got an increase in salary, or cut cost elsewhere, and they are now able to make a higher monthly payment than they had agreed to initially. This can be a viable option for someone eager to pay off their mortgage but without the incentive to pay more than required every month. For more information on how to pay off your mortgage earlier, check out this helpful video.
Lastly, we will discuss the types of loans available, and keep in mind that each one comes with its own interest rates.
The great news here is that there are multiple options available for those interested in purchasing a mobile home. And contrary to popular belief, banks are taking notice to the sustainable housing trends. This list is not exhaustive but it serves a purpose of describing loans most common to mobile home buyers.
Conventional Loans: A conventional loan, as deﬁned by Nerdwallet, “are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more.” Conventional loans tend to be the lowest, but most folks go for a government backed loan because few private lenders provide a conventional loan for less than a 20% down payment. If it is a low downpayment commercial loan, then yes, FHA loans have lower interest rates, but then they also require PMI, which significantly adds to the monthly payment.
The interest rate can also ﬂuctuate based on how the government increases or decreases the “prime rate,” the cost for the bank to borrow money.
FHA Loan: An FHA loan is one of those mentioned above as “government-backed.”
FHA stands for the Federal Housing Administration.
These loans are designed for those who have relatively good credit and debt-to-income ratio but that don’t have the funds for a large down payment. However, folks with bad credit can also get an FHA loan, but we wouldn’t advise this move as this is what played a major role in the 2008 housing crash.
We definitely don’t want to repeat history there!
The down payment with this loan can be as low as 3%. They do require mortgage insurance as well as more ﬁnancial history in order to qualify.
In relation to mobile homes, FHA loans have certain requirements for how it is secured to the land, but can also be used for placing your mobile home in a park. There is one important piece of information we want to let you in on though, you can’t get an FHA loan for a mobile home in a park without a minumum 50 year lease agreement.
So, with all of that taken into consideration, generally homes in mobile home parks – are not eligible for FHA loans.
VA Loan: A Veterans Affairs Loan, helps Service Members, Veterans, and eligible surviving spouses become homeowners.
It is similar to the FHA loan, in that it requires extra paperwork, more requirements, and has a low down payment, or sometimes no down payment. And, of course, a lower interest rate.
Your length of service or service commitment, duty status and character of service determine your eligibility for specific home loan benefits. VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms. Read more on Veteran’s Affairs here.
For more information on FHA & VA loans, check out our Braustin Academy video.
Chattel Loans: There are quite a few benefits from obtaining a chattel loan. First, the loan will be for just the cost of the home, which means a smaller loan. Second, the land is free and clear if your loan is defaulted and the home is repossessed—certainly not a pleasant thought, but a practical one. Third, the home is taxed separately from the land, meaning smaller monthly payments on what is called escrow (the part of your payment made toward tax and insurance). because only the home is being purchased, it is a loan the bank considers “high risk.” This means that banks will typically require at least 5%-10% down payment and charge a higher interest rate—between 6.99% and 12.99% dependent of course on credit score and total down payment.
For more information on Chattel loans, check out our Braustin Academy video.
Why does any of this matter?
Interest Rates are essentially how much a loan actually costs. Banks will not only use one of these factors to determine your rate but all of them together. Some great take always from this article: work on your credit score – it’s not the end of the world and there are options for those with not so perfect credit – but banks will reward those who make progress, save up your down payment, budget your monthly mortgage payment, and get the type of loan that will cost is the most affordable for your family’s budget—both up front and in the long run.
So that’s it: How Much Does My Interest Rate Affect My Home Loan? This blog has been revised to keep information and images previously shared, current. Follow the links in this page to read more information on each topic. We would love to chat with you or hear about your experience on our Facebook page or through our Contact Form.