Those looking to buy a home in Colorado must know the Colorado mortgage rates to determine whether their home is affordable. All borrowers should also know how these rates affect their payments, and how they can choose a loan with better rates to fit their needs. We’ll explain it all in the article below.
There is no clear-cut method for arriving at the exact rate all Colorado mortgage rates published by each bank should be. However, there are a few methodologies for finding the mortgage rate average, and then finding if a bank is or is not competitive.
In general, banks use what is known as the PRIME rate to determine how much they will charge borrowers for a mortgage loan. Traditionally, the PRIME rate is used as a benchmark for the rate a bank would charge a borrower with a perfect credit score, perfect job stability and income, and with a sizeable down payment.
From this rate, we can add on percentages to arrive at a reasonable estimate of what each borrower would be likely to pay. Use the guidelines below, which are based on credit scores, to get a rough idea of how Colorado mortgage rates look for your home purchase:
Under 500 – Borrowers with a credit score under 500 will pay the highest premium to PRIME rates, often 6-6.5% over PRIME. Thus, if the PRIME rate is 3.25%, a borrower with a poor credit score would pay rates of just under 10% annually to buy a home.
500-539 – Colorado mortgage rates are much more affordable for borrowers in this category. Borrowers with a credit score of over 500 but less than 540 will pay roughly 4% over the PRIME rate. With rates at 3.5% for good borrowers in 2011, a person with this score could manage a loan with an interest rate of less than 8%.
540-600 – Making a big leap into the 540-600 range will provide for rates only 3.5% over the prime borrowing cost.
600-660 – Those who are in the 600-660 range for credit scores have plenty of negotiating room. All credit scores in this range are under average, however, the risk is not nearly as great with a 600+ borrower than a borrower with less than a 500 credit score. In the best case scenario, expect a loan with a rate only 1.5% higher than prime.
Your Colorado mortgage rate quote will be based on two factors: the current price for money, or interest; and the risk you present to the bank. Lenders would prefer that everyone pay back their loan on time, and never skip a payment. However, we know that this isn’t the case, and as such lenders have to compensate for risk by giving borrowers with bad credit higher interest loans.
However, there are a few things you can do to improve the rates you receive from a lender. These actions will save you thousands of dollars in interest:
Down Payment – A down payment is the absolute best way to get a lower rate as you now present a smaller risk to the bank. In the event that a home is foreclosed, a bank will auction the property to return its investment. If the home was 100% financed, then the bank would have to get exactly the same amount out of the property in an auction as it lent to the homeowner. On the other hand, if the home were 80% financed with a 20% down payment, the bank would only have to get 80% of the selling price, insulating the lender from downside risk.
Clean up accounts – If you have a bad credit score, it’s probably time for some spring cleaning. Among the fastest methods for improving a bad credit score is to pay on time for all your accounts. After that, look to reduce your existing loan balances as close to zero as possible.
Mind your ratios – Credit scores aren’t everything. Mortgage rates will also rise and fall with non-credit score factors like existing debt, or debt to income ratios. The bank will lend as much money as it can as long as it can have the safety of knowing it will get repaid. Having small debts, like a car payment, for example, can make very big changes in your monthly cash flow. A $500 car payment represents $500 that cannot be used to pay down your home, and your lender will take this into consideration.