Interest Rates

Interest rates are always among the first things you look at when taking out a mortgage (or any other loan, for that matter). After all, it's a rate you'll have to stick to for at least the next few years. But while most Laguna Beach home buyers know to shop for lower rates, few of them really know what makes them go up or down. How are interest rates really determined?

Mortgage interest rates are the product of several factors. The most common are the borrower's financial situation, the type and value of the home, the current Laguna Beach real estate market. Your LagunaOC.com agent can help you get a clear idea of what rates to expect considering these factors. Other things that affect your rates include:

Your down payment. The down payment not only counts against the loan amount; it also gives your lender a peek into your borrower profile. Borrowers who can afford to pay more up front are seen as more financially stable and thus carry lower risk. A cash-down of at least 20% of the home value usually gets the best rates.

Your credit score. Your credit score serves as a snapshot of your personal finances. It takes into account your previous and current loans, income, employment records, and payment history. Credit scores are measured on a scale of 300 to 850; banks usually give the best rates to borrowers with scores of 750 and up.

Your income. Part of your credit report shows your debt-to-income ratio, or how much of your monthly income will go to the mortgage and other credit. Lenders want to see that you can comfortably afford the loan with whatever you're making. The standards vary by lender, but a DTI of 31% or lower is generally considered acceptable.

Your loan amount. The higher the loan amount, the higher the risk it puts on your lender. That's why more expensive Laguna Beach homes usually carry higher interest rates. Some lenders have an upper limit of $999,999; beyond that, you can either split your loan into two or settle for a slightly higher interest.

Your mortgage type. If you're going for a regular fixed-rate mortgage, rates will be slightly higher because you're paying for stability. However, lenders usually put lower rates on terms below the usual 30 years since it's less risky. Adjustable-rate mortgages often start with lower-than-average rates, but may go way up after the initial period.

Your occupancy plans. Lenders want to know how you plan to use the home because it determines how well it will be maintained. Rental properties often get more abuse than primary residences, so a bank may set a higher rate if you plan to rent it out. Different rates also apply to vacation homes, second homes and commercial properties.

Your percentage points: A point works much like pre-paid interest-you pay a certain amount at closing, and it will be counted accordingly to your interest. Each point costs about 1% of the loan amount and reduces your interest rates by at least one-eighth of a percent. Most agents will recommend buying points for those who plan to stay in the home long-term, as it takes time for the savings to add up.