The Lone Star state may have one of the most tightly-regulated mortgage industries of all the 50 US states. Texas mortgage interest rates are some of the best, though, despite laws that favor homeowners over banks and a slow and steady real estate industry growth over boom and bust cycles that plague other areas of the US.
It’s important to understand how mortgage interest rates work to understand how they affect Texas residents.
Mortgage interest rates are primarily driven by the length of a mortgage loan. Borrowers who want to borrow money for short periods of time, 10-15 years, will usually get the lowest mortgages rates because the interest rates only rise with time. Naturally, those who seek out loans for 30 years or more will pay the highest rate. Rates are influenced by the length of the loan, and also the risk of the loan. As you can imagine, there are far more variables that come into play for a 30 year mortgage loan than there are variables for a 15 year mortgage loan.
Banks have to balance this risk with the going rate for borrowing. Banks, much like individuals, have to borrow money to make investments. Banks borrow money from other banks at an interest rate known as the LIBOR rate, or the London Interbank Offered Rate. This rate is set internationally, and banks use this as the bottom line price for mortgage interest.
If a bank can borrow money at 2%, then it can pass this rate onto consumers with a slight markup. This markup is dependent on the length, risk, and profit potential of each loan. A bad credit borrower is a much greater risk to a bank than a good credit borrower. A borrower with bad credit might pay 7% for a mortgage loan while a good credit borrower would pay 5% for a loan with the same duration. If the bank prices in a 2% profit for itself, then the difference between the bank’s cost of borrowing and the cost to the borrower is how risky the bank sees each individual borrower.
How to Get a Better Rate
Texas mortgage interest rates vary by the borrower’s risk and amount of time for the loan, but there are many other smaller factors that come into play, too. For one, borrowers can offer to put up a larger down payment on a home in order to reduce the interest rate. Banks see a down payment as a borrower’s commitment to paying off the home. Thus, borrowers who put a larger percentage amount down against the home will get the best rate.
Additionally, borrowers who work to pay down other debts they have before shopping for a home will get a lower mortgage interest rate, as well. By paying down your existing debts before buying a home, your bank will see that you have no or very small debts relative to your income. This is known as a debt to income ratio, and Texas mortgage interest rates do vary based on debt to income levels. If someone has a large debt load relative to their annual income, it could potentially affect their ability to make payments in the future. However, a borrower with no debt but a smaller income might appear to be a much lower risk, since even though the borrower is a low-income borrower, the borrower is not overextended on a car loan, student loan, or other existing debt.
Always take the time to do proper due diligence on loans before signing the dotted line. Some banks charge smaller interest rates but make up for the difference with closing costs and origination fees. Others will give higher rates to borrowers, but charge zero closing costs or origination fees. If you can afford to pay more upfront when buying your home, it may make sense to pay origination fees to reduce the long-term interest rate. However, if you cannot afford to pay upfront, then a higher rate may be advantageous.