How Is Interest Rate Decided
Whenever you apply for a mortgage, there are three very important factors that govern the way your interest rate is decided. They are as follows:
Federal Reserve Discount Interest Rate
Banks and lending institutions borrow money from the Federal Reserve Banks. The discount rate is the interest rate a Federal Reserve Bank imposes on financial institutions to borrow funds on a short-term basis. This rate is set by the boards of directors of the Federal Reserve Banks. The discount rate has a direct effect on the interest rate on short-term loans that banks charge their commercial customers with high credit ratings.
FICO Score and Credit Report
There are number of companies in the US that collect and sell information on people. This information pertains to where they work and live, how they pay bills, whether they saved been sued or arrested, or ever been bankrupt. These companies are called Consumer Reporting Agencies (CRAs). One of the most common CRA are the credit Bureaus. Lender approach these credit bureaus to get a credit report on potential borrowers.
The FICO score is a method of finding out the probability that a lender will pay his debts. FICO score is in a form of a number and a potential borrower can have a good credit report and FICO score if he pays all his bills on time and does not have a large credit
Lenders’ Business
Potential borrowers must realize that banks and lender are here to make a profit. However, these same banks and lenders are working in a highly competitive market. If the banks charge you too little, they face the risk of losing their business. On the other hand, if they charge a high rate of interest, then they risk losing the customer to their competitor. Therefore, if you want the best interest rate, shop around and look for best possible deal.
Though shopping around is in a borrower’s best interest, another factor that affects the FICO score is the number of times the borrower’s credit report is assessed in a particular period of time. Therefore, getting too many to-be lenders to get your credit report would render you with a lower FICO score than you originally had. This could be the reason why potential borrowers are turning to online mortgage companies. These companies do not request for a FICO score till they have made their initial quote.
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