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7 factors that determine your mortgage interest rate

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Infographic on mortgage shoppingIf you’re like most people, you want to get the lowest interest rate that you can find on your mortgage loan. But how is your interest rate determined? That can be difficult to figure out for even the savviest of mortgage shoppers.

Your lender knows how your interest rate gets determined, and we think you should, too. That’s why we’ve created a new interactive tool that lets you explore the factors that affect your interest rate and see what rates you can expect.

Armed with information, you can have confident conversations with lenders and ask questions to make sure you get a good deal. Here are seven key factors that affect your interest rate that you should know:

1. Credit score

Your credit score is a number that lenders use to help predict how reliable you’ll be in paying off your loan. Your credit score is calculated from your credit report, which shows all your loans and credit cards and your payment history on each one. In general, if you have a higher credit score, you’ll be able to get a lower interest rate. You can use our tool to explore how your credit score impacts the rates available.

Before you start mortgage shopping, get your credit report. Check for errors, and make sure to get them fixed. Examine your debts, and see if there are any you can pay down to improve your score. Learn more about how to raise your score.

Credit scoring is complicated—in fact, you have many credit scores, not just one. You can learn more about how mortgage lenders evaluate your credit history and use credit scores.

It’s a good idea to try to get a sense of your credit score range before you start mortgage shopping. Once you have an idea of your credit score range, put it into our tool to get more accurate rates.

2. Home location

Many lenders have slightly different pricing depending on what state you live in, so to get the most accurate rates using our tool, you’ll need to put in your state. If you live in a rural area, you can use our tool to get a sense of rates for your situation, but you’ll want to shop around with local lenders as well. Making a loan in a rural area can be more complicated, so large lenders may not serve that area.

3. Home price and loan amount

Your home price minus your down payment is the amount you’ll have to borrow for your mortgage loan. Typically, you’ll pay a higher interest rate on that loan if you’re taking out a particularly small or particularly large loan.

If you’ve already started shopping for homes, you may have an idea of the price range of the home you hope to buy. If you’re just getting started, real estate websites can help you get a sense of typical prices in the neighborhoods you’re interested in.

4. Down payment

In general, a higher down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can put 20 percent or more down, do it—you’ll usually get a lower interest rate.

If you can’t afford 20 percent down, experiment to see how lower amounts affect your rate.

5. Loan term

The term of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments. Learn more about your loan term, and then try out different choices with our tool to see how your term affects your rate and interest costs.

6. Interest rate type

Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates have an initial fixed period, after which they go up or down based on the market.

In general, you can get a lower initial interest rate with an adjustable-rate loan, but that rate might increase significantly later on. Learn more about interest rate types, and then use the tool to see how this choice affects interest rates.

7. Loan type

There are several broad categories of loans, known as conventional, FHA, and VA loans. Rates can be significantly different depending on what loan type you choose. You can learn more about the different loan types in our Owning a Home loan options guide.

Now you know

That’s it—know these seven factors and you’ll be well on your way to getting a great interest rate for your situation. And just remember:

  • You don’t need to have all seven of these factors decided before experimenting in our tool.
  • As you consider your budget and learn more about your options, come back often. The more you know, the more accurate the rates will be.
  • As you start talking to lenders, compare their offers to the rates in the tool to see if you are getting a good deal.

Now go forth and find a great mortgage rate!

Accepting applications for our Advisory Board and Councils in 2015

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To be sure that we hear from a variety of experts with diverse viewpoints, we set up the Consumer Advisory Board and two other advisory groups – the Community Bank Advisory Council and Credit Union Advisory Council. These groups allow us to hear directly from small financial institutions. They also provide us with information about emerging trends and practices in the consumer financial products and services industries.

Today, we’re accepting applications for membership on all of our advisory groups. We’re inviting applications from individuals who can provide us with guidance as we carry out our work. Here’s what we’re looking for:

  • Experts in consumer protection, community development, consumer finance, fair lending, and civil rights
  • Experts in consumer financial products or services
  • Representatives of banks that primarily serve underserved communities
  • Representatives of communities that have been significantly impacted by higher priced mortgage loans
  • Current employees of credit unions and community banks
  • Academics (Experts in research methodologies, framing research questions, data collection, and analytic strategies.)

How many seats are available?

  • 10 seats on the Consumer Advisory Board will become vacant in the fall of 2015.
  • 7 seats on the Community Bank Advisory Council will become vacant in the fall of 2015.
  • 8 seats on the Credit Union Advisory Council will become vacant in the fall of 2015.

5 reasons to check out our Owning a Home tools now

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Five reasons to check out out Owning a Home tools now Buying a home and taking on a mortgage is a big financial decision, one most of us will make only a few times in our lives. No matter where you are on your journey, whether you’re currently looking for a home, shopping for a mortgage, or just curious for your future, we have tools and information to help you confidently make good decisions to reach your goals.

This week, we’re launching our latest effort to help you navigate the market, ask the questions, and take the steps that will help you to find the mortgage that’s right for you. We’re calling it Owning a Home.

We’re committed to making it easier for consumers to shop for and get a good mortgage. Here are five ways that Owning a Home can help you find the best mortgage for your situation:

1. Owning a Home helps you know what to expect.

Shopping for a mortgage isn’t like shopping for a new toaster. You can’t easily go online and double check to make sure you’re getting the best price (or, in the case of mortgages, the best interest rate). Owning a Home lets you see real data on what current interest rates look like for your situation.

With a simple visualization, you can tell what kind of rates real lenders are offering to borrowers in your situation, and quickly understand what a good deal looks like for you. Armed with this information, you can plan how much to spend on a new home and know what to expect when you talk to lenders.

2. Owning a Home helps you understand your loan options.

It might seem like real estate agents, bankers, and mortgage brokers speak a foreign language. They use words like “ARM” and “principal” as if you should already know them, and it can be frustrating. Owning a Home demystifies this jargon, so you can have conversations with your lender confidently. We help you understand how the choices you make about your loan will impact your costs and risks.

3. Owning a Home lets you imagine new options.

You can explore different options to see which might be the best fit for you. You can see the factors lenders consider when determining your interest rate, like down payment and credit score. Because the tool is interactive, you can start to see how even small changes affect your interest rate. Considering saving up for a higher down payment before buying? See how different down payment amounts affect your interest rate. Credit score lower than you like? See how your rate could be lower with a higher credit score, and consider if it’s worth it for you to improve your credit before buying a home.

4. Owning a Home is there for you from start to closing.

Use these tools from the very start of your home buying process through to closing. Closing is the time when you dot the i’s and cross the t’s— it’s when you legally commit to your mortgage loan. To help you make sure you don’t miss anything important, we’ve created a detailed checklist and an easy-to-read guide to the forms you’ll be signing during closing.

5. Owning a Home helps you make smart choices to serve your own goals.

All of the tools and resources available on Owning a Home aim to give you the information you need to feel more confident throughout the entire home buying process. Our tools are intended to help you decide what kind of loan you want to get, find a good deal from a mortgage lender, and close like a pro. We’ll help you spot red flags and ask the right questions.

Safer mortgage markets for you

From our very first day as an agency, we’ve been working hard to improve your experience when it comes to purchasing and paying for your home. We developed new forms that make it easier to compare your loan options, using your input to guide our decisions. We’ve also been working to make the market safer, cleaning up bad practices and requiring good ones. In addition, we’ve worked to get responses to your mortgage complaints, and we’ve explored ways to make the closing process less painful.

Nearly half of mortgage borrowers don’t shop around when they buy a home

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47 percent of homebuyers do not compare lendersBuying a home is a big purchase, but it’s just that: a purchase. When it comes to spending money on our daily expenses, we have lots of options to help us find the best deal possible. Take, for example, digital gadgets. To get a good deal you can search for sales, find coupon codes, and research whether it’s less expensive to buy something from a big box retailer or on the manufacturer’s website.

We shop to find the best price for laptops or appliances, but a report of recent mortgage borrowers found that almost half of us don’t shop around for a mortgage when we buy a home.

Failing to shop for a mortgage could cost you. Consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates. For example, our research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent. Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month. Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.

The survey of 2013 mortgage borrowers also found that modern mortgage borrowers:

  • Often fail to shop: Almost half of borrowers seriously consider only a single lender or broker before deciding where to apply.
  • Apply to only one lender or broker: Seventy-seven percent of borrowers only end up applying with a single lender or broker, instead of filling out applications with multiple lenders or brokers to see which can offer the best deal.
  • Rely on information from people with something to sell: Lenders and brokers were the most popular source for information about mortgages, with 70 percent of mortgage borrowers reporting that they used them “a lot” as a source of information. Thirty percent of borrowers say they relied heavily on their real estate agent for mortgage information. While lenders, brokers, and real estate agents can be informative, they also have a stake in the transaction. The report found many fewer, 20 to 41 percent of borrowers, get a lot of their information from outside sources such as websites, financial and housing counselors, or friends, relatives or coworkers.
  • Shop more if they know more: Borrowers who were confident about their knowledge of available interest rates were almost twice as likely to shop as consumers who reported being unfamiliar with available interest rates.

We believe that mortgage borrowers should be shopping around. We’ve created Owning a Home, an interactive, online set of resources and tools designed to help borrowers approach the mortgage shopping process, with more information.

Owning a Home sets out to help you feel comfortable shopping in the mortgage market. These unbiased tools and resources aim to inform and empower you when you are shopping for a mortgage. The tools take you from the very start of the home buying process through to the closing table. At every step, Owning a Home provides information and questions to ask. The tools include:

  • Guide to loan options: A primer on the loans available to help you finance your home. In this resource, you’ll find information on the length or term of loans, whether a loan is fixed or adjustable, the different loan types available, including FHA and VA loans.
  • Guide to closing documents: A document that explains the important closing forms, so you know what information is on the forms, and where to find it.
  • Closing checklist: Closing is when you finalize your mortgage. You need to go into the process prepared and ready to enter into your contract. Our checklist helps you to realize what you need to do, and gets you ready for closing, one step at a time.

Our survey will continue each year, and we look forward to hearing more from borrowers to see if our Owning a Home tools change the way the modern mortgage borrower approaches the mortgage market.

Check out our report for more in-depth research on the consumer’s responses. Then check out Owning a Home to help you navigate the market, ask the questions, and take the steps that will help you find the mortgage that’s right for you.

Infographic on mortgage shopping

Are unpaid debts a military career-killer?

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Military personnel who have trouble handling their personal finances can very quickly find their duty status, potential promotions and even military careers in jeopardy. And, over time, the lingering burden of debt can add stress to their personal relationships and damage their credit profile. But does that debt have to be a career-killer?

Servicemembers, veterans and military families have submitted more than 11,000 debt collection complaints to the CFPB since we began accepting them in July 2013 – our fastest-growing category of complaints. Among other things, we’ve received reports that some debt collectors are threatening servicemembers by claiming that they will report the unpaid debt to their commanding officer, have the servicemember busted in rank or even have their security clearance revoked if they don’t pay up.

The threat of losing a clearance is a hot-button item for servicemembers – and some debt collectors have been known to use that threat as leverage to get a servicemember to pay. Do they really have the power to get your clearance revoked?

Practically speaking, debt collectors aren’t able to contact your security manager about your debts nor do they have the authority to influence the manager’s decisions about your security clearance. However, your failing to pay your debts on time can result in negative information being reported to the credit reporting bureaus. And that negative information on your credit report may cause your security clearance to be pulled when it’s up for review.

If you find that your finances have put your security clearance in jeopardy, you should do your best to show that your financial problems resulted from circumstances beyond your control (not a pattern of irresponsible behavior) and that you acted as responsibly as you could under the circumstances. This may include showing that you’re currently living within your means, that you’re making a good-faith effort to resolve your unpaid debts, and that you’re disputing debts that aren’t yours.

When a financial problem arises, you should speak with your installation’s Personal Financial Manager (PFM) and/or JAG office to get free, expert advice and assistance. Be sure to keep documentation of all your commitments, efforts to resolve delinquencies, and any disputes about debts – it could be helpful to you later.

If you do receive notice that your security clearance eligibility is being denied or revoked, DoD regulations give you the right to a hearing before an Administrative Judge of the Defense Office of Hearings and Appeals (DOHA). This hearing is your opportunity for a face-to-face meeting with an official, independent of your chain of command, to explain your situation and the steps you’ve taken to address the issues identified in a written Statement of Reasons (SOR).

According to DoD, DOHA hearings are designed to be user-friendly. If you don’t have an attorney, you can represent yourself or bring a non-attorney representative to assist you. DOHA hearings allow you to present any statements or documents that are relevant to your situation. In other words, the DOHA hearing is your chance to present your side of the story. It’s there to make sure that your voice is heard and that you are being treated fairly.

Be alert to the deadlines in the SOR process, seek expert assistance, ask for the opportunity to appear personally before a DOHA Administrative Judge, and bring whatever documentation and character witnesses you can.

A written transcript of your testimony and the testimony of any witnesses whom you bring to the hearing will be provided to you free of charge. That transcript, along with copies of any documents you submit (such as canceled checks, receipts, bank statements, tax returns, settlement agreements, character recommendations, etc.), and the Administrative Judge’s recommendations will become a significant part of the record that is forwarded to the officials deciding your security clearance eligibility.

Check out the DOHA website for more information on hearings and process.

Managing your debts, expenses, income and other personal finance matters is more than just a tactic to guard your security clearance. It’s also a day-to-day exercise that can help lead you and your family to financial security. If you need help planning, hit a bump or need assistance with a problem you can’t fix along the way, there are a number of resources available to you.

Like your installation’s PFM, the Department of Defense’s Military OneSource offers free financial counseling that can help you better manage your money. If you need a fast and accurate answer to a money question, you can check out Ask CFPB – we have more than 1,000 answers that you can search. Finally, if you have a problem with debt collection or another consumer financial product or service, you can submit a complaint to us online or by calling (855) 411-2372. We are here to help.

A New Year’s resolution to conquer your student debt

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Each year, nearly 5 million college students leave school with student debt. For most of them who graduated this past spring, their six-month “grace period” just ended and those first bills have just have arrived.

For all of you faced with student loan payments and crafting New Year’s resolutions to conquer your debt, we’ve put together some tips to help you navigate through the noise.

Whether you’re just starting out or if you’re worried you’re in too deep, taking action today can help you save money, build your credit, and get you on the road to being debt-free.

For everyone

1. Know what you owe

Before you start, it will be helpful to have a list of your loans and the required monthly payment amounts. It’s very important to know the name of your servicer (the company that sends your student loan bill each month). This might be a different company from the original lender.

Check the national student loan data system
If you aren’t sure what kind of loans you have, visit the National Student Loan Data System (NSLDS) for Students and select “Financial Aid Review” for a list of all federal loans made to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you).

Request a free credit report
Unlike federal student loans, there is not a single website that contains information about all of your private student loans. If you are unsure whether you have a private student loan, request a free credit report at annualcreditreport.com. Private student lenders may share information about your loans with credit reporting agencies even while you’re still in school or in deferment. You’ll need to contact each of your private student loan servicers to determine your total loan balance.

2. Automate and save

Consider contacting your loan servicer to set up auto-debit. Your servicer will automatically withdraw money from your bank account so you’re less likely to miss a payment. Many lenders offer an interest rate reduction for those who set up auto-debit, which could save you hundreds or thousands of dollars over the life of the loan. If you choose to sign up for auto-debit, make sure you have enough money in your bank account to cover your loan payment; otherwise you might get hit with overdraft fees or other penalties. You can cancel your auto-debit by contacting your servicer.

If you’re worried you’re in too deep

3. Enroll in an income-driven payment plan

There are a number of income-driven payment plans that can lower your monthly payment for your federal student loans.

Pay as you earn
If you graduated this year or later, Pay As You Earn (PAYE) is a newer repayment plan that is likely available for your federal student loans. The plan caps your monthly federal student loan payment at 10 percent of your discretionary income. To determine whether you qualify for PAYE, check out the Pay As You Earn calculator created by the U.S. Department of Education. Learn more at Ask CFPB.

Income-based repayment
If you have older loans, you should look into Income-Based Repayment (IBR). You can get a lower payment with IBR if your federal student loan debt is high relative to your income and family size. While your loan servicer will perform the calculation to determine your eligibility, you can use the U.S. Department of Education’s IBR calculator to estimate whether you would likely benefit from the IBR plan.

Many borrowers with federal Direct Loans can now enroll in IBR and PAYE online. Learn more at Ask CFPB.

4. Request repayment options for your private student loans

Although some companies are willing to help borrowers during a time of financial distress, unfortunately, not all private student loan companies offer assistance when consumers are struggling to repay their loans. We’ve created a sample letter that you can use to ask your lender or servicer to respond with accurate information about alternative repayment plans and loan modification options – potentially giving you valuable information on how to reduce your monthly payment or to temporarily postpone making payments.

We also published a sample financial worksheet for you to assess the amount of money you can put towards your loans. Some student loan companies request recent pay stubs or a bank statement to verify income and expenses, which you should consider attaching to your letter or e-mail.

Other things to think about

5. Sign up for loan forgiveness

We estimate that more than 25 percent of the U.S. labor force works in public service. This includes teachers, librarians, firefighters, military personnel, law enforcement, first responders, nurses, and social workers. There are a number of special loan repayment and forgiveness programs to assist student loan borrowers working in public service. Check our guides for servicemembers, teachers, and other public servants.

We also created a toolkit for public service employers with everything they need to help their employees tackle their student debt. The best way to get your employer on board is to ask! Get started.

6. Protect yourself from co-signer surprises

We published a report this year that describes complaints we received from borrowers who were placed in default, even though their loans were in good standing which can happen if a co-signer (typically a parent or a grandparent) died or filed for bankruptcy.

Many lenders advertise that a co-signer may be released from a private student loan after a certain number of consecutive, timely payments and a credit check to determine if you are eligible to repay the loan on your own. If your lender offers co-signer release, you may want to ask about this benefit and remove your co-signer as soon as you are eligible. To help you get started, we’ve put together a sample letter that you can send to your student loan servicer.

7. Try to refi

If you have graduated, obtained a job, and have excellent credit, you may be able to qualify to refinance your existing private student loans with a new private loan at a lower rate. Unfortunately for many in this situation, there are only a small handful of financial institutions that offer this financial product. Learn more at Ask CFPB.

8. Avoid unnecessary interest if you’re paying extra

Since many borrowers can’t refinance, one of the only ways to avoid paying unnecessary interest is to pay your high-rate loans off more quickly. You can send this sample letter to your servicer to ask them to direct any extra payments toward your highest-rate loan, which may save you hundreds of dollars or more in extra interest payments.

9. Submit a complaint if you’re having trouble

If you’re facing inconsistent information, poor customer service, or any other issue with your student loan servicer or a debt collector, you can submit a complaint to us. We’ll forward your complaint to the company and work to get a response from them. Visit consumerfinance.gov/complaint or call us at (855) 411-2372.

If you’re just getting started and want to learn more about your repayment options, you can also try out our Repay Student Debt web tool.

Remember, missing payments on your federal or private student loans can hurt your credit rating and your financial future. Missing a single payment on a student loan can result in late fees, additional interest charges, and can increase the cost of repayment. Taking action today could save you hundreds or thousands of dollars over the life of your loan.

Make this new year one where you take control of your student loans and get on the path to be debt-free.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about our work for students and young Americans, visit consumerfinance.gov/students.

The CFPB blog aims to facilitate conversations about our work. We want your comments to drive this conversation. Please be courteous, constructive, and on-topic. To help make the conversation productive, we encourage you to read our comment policy before posting. Comments on any post remain open for seven days from the date it was posted.