Interest Rates Might be Boring, But Let’s Talk About Them!
I don’t know about you, but when I hear about “interest rates” my eyelids begin lowering of their own accord and there are about a million other things I’m more interest-ed in. (see what I did there?)
This mysterious thing called “interest” affects how much and how long you will be paying for something. It’s an unavoidable part of getting a loan (unless you have really generous parents).
Interest rates are a big topic in mobile home loans as they tend to be higher than other loans.
Let’s discuss some of the pieces involved in determining an interest rate so we can understand why the mobile home industry has this reputation.
So let’s talk Interest Rates, otherwise known as: the price of your loan.
4 Factors Involved in Determining Interest Rates:
Your credit score is simple. It is a number that reflects how trustworthy you have been in repaying loans. Credit scores take all sorts of loans into consideration, from a $40,000 car to a $500 TV, and even that pesky Walmart credit card you might have gotten talked into.
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, no credit is not necessarily better than bad credit. The two are pretty much on par with each other, although it is easier to make good credit from no credit than it is good credit from bad.
So what does this have to do with interest rates?
With a low credit score often comes a high interest rate.
Well, essentially, when a bank loans out money, they are taking a chance on you as a borrower. They see that your past performance hasn’t been stellar and have to plan for the possibility of foreclosure—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.
Unfortunately, this is an aspect that often makes home buyers unable to purchase a home, even on the more affordable mobile home.
This is one reason why manufactured homes loans have a reputation for higher interest rates, often the buyer’s credit score is too low to qualify for a large bank loan, or the interest rate on a large loan would make their monthly payments unaffordable, meaning their interest rate would have been high with or without the mobile home.
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 home buyer—to begin repairing your credit (if it’s bad) and begin building it (if you don’t have any) as soon as possible.
Mortgages are a business. Banks can’t loan out money without knowing their borrowers can pay it back (they tried that, it didn’t work out too well). Down payments are a measure of personal investment you have in your property.
Say I wanted to buy a home for $100,000. I had $40,000 as a down payment, leaving only $60,000 I need from the bank.
The bank sees that I have invested 40% of my own money into this house and if I default on that loan I am losing almost as much as they are.
In this case, they are more likely to offer me a lower interest rate, knowing over time I have a very high chance of paying my loan and of them turning 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 different ways to finance. And each option will have different requirements in regards to the down payments percentage.
For instance, financing land without a home will require a large down payment, will more often than not have a shorter term (see below), and still have a relatively high interest rate.
As you will begin to see, all of these loan factors tie into each other and are assessed as a whole in order to determine your loan’s interest rate.
Here is a chart taken from MortgageCalculator.org on different home loan terms:
|Loan Type||Percent of Borrowers Buying a Home||Percent of All Home Buyers|
|Other Loan Terms||2%||1.76%|
|Use Any Type of Financing||100%||88%|
|Paid Cash in Full||N/A||12%|
This chart shows that most borrowers opt for a 30 year mortgage—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.
A 15 year mortgage would keep interest rates at the lowest possible, while meaning a higher monthly payment in order to pay the loan back more quickly.
This option is understandably less appealing than the 30 year mortgage, as many borrowers in the manufactured home or site built industry would prefer to have low monthly payments for their current financial situations than commit to unreachable higher monthly payments.
One available option many buyers are unaware of is the ability to refinance their loan should they come into more abundant financial times where they are able to make a higher monthly payment.
The last factor—though there are more—we will discuss are the types of loans available, each one with its own interest rates.
This list is not exhaustive, but describes loans most common to manufactured home buyers.
Conventional Loans: A conventional loan, as defined by Investopedia, “is any type of homebuyer’s loan that is not offered or secured by a government entity, like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service, but rather available through or guaranteed a private lender (banks, credit unions, mortgage companies)…”
Because they lack government insurance, conventional mortgages, in manufactured or site built homes, typically have higher interest rates.
The interest rate also fluctuates based on how the government increases or decreases the cost for the bank to borrow money.
FHA—An FHA loan is one of those mentioned above as “government-backed”. 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.
The down payment with this loan can be as low as 3.5% and the interest rates are almost always lower than those of a conventional loan.
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.
VA—A VA loan or “Veteran’s Affairs” is just what it sounds like—a type of loan for military veterans.
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.
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.
Work on your credit score, save up your down payment, budget your monthly mortgage payment, and get the type of loan that will cost you the least—both up front and in the long run.