What Affects My Mortgage Interest Rate?

Unquestionably, the interest rate charged on your mortgage is the single biggest determinant of your loan’s affordability and the total cost of owning your home. For many homebuyers, the advertised interest rate draws them to a particular lender in the first place. However, what you see going into the mortgage process isn’t always what you get by the time you are finished. The primary reason is that several factors can affect your interest rate throughout the process.

Your Credit Score

The most significant determinant of your interest rate is your credit score. Lenders want to lower their risk as much as possible, and your past credit history is the biggest risk indicator. Lenders will offer their most competitive interest rate to attract people with the highest credit scores. If you score more than 750, you will likely receive their best rate. The lower your credit score is, the lower the interest rate you can expect.

The Loan Amount

How much you borrow can also affect your rate. Borrowers of jumbo loans – loans over $417,000 – are charged higher rates due to the higher amount of risk associated with a large loan, regardless of your credit. Smaller loans - $100,000 or less – may also be subject to higher rates because it is more difficult for the lender to make a profit without charging more interest.

Your Down Payment

How much you put down on your house will make a difference in your rate. The larger your down payment is, the lower risk the lender assumes. If you put down 20%, you can expect to qualify for a lower mortgage rate. However, it pays to shop because some lenders will offer lower rates on lower down payments.

Your Loan Term

Lenders are willing to offer lower rates on shorter-term loans because they can get their money back more quickly. It also means that you will pay less interest over the life of the loan. Depending on a number of factors, the difference in rates between a 30-year fixed loan and a 15-year fixed loan can be as much as 90 basis points.

Your Location

A lesser-known factor is the location of your home. Lenders look at the health of the housing market where the home is located. If it is in decline, lenders may charge more interest because there may be a higher risk of default in the area. Also, if you buy in one of the more expensive areas which require jumbo financing, you can expect a higher mortgage rate.

While all these factors are considered by mortgage lenders when determining how much interest to charge, they may be weighted differently by different lenders. However, for most lenders, it all starts with the credit score. So, that’s where you should place your greatest emphasis when preparing to apply for a mortgage.