Mortgage lenders consider various factors when deciding your mortgage's interest rate. Some factors are completely out of your control, while others include your financial health, credit history and decisions you make. Understanding what will and won't impact your rate can be important whether you want to refinance your mortgage or buy a home.
11 Factors That Determine Mortgage Rates
Your mortgage offers can depend on the following 11 factors, but you'll also find that your rates can vary from one lender to another. Understanding these factors can be helpful, and it's always a good idea to shop around for a loan to make sure you're getting the best rate possible.
1. Market Conditions
Inflation rates, the bond market, the federal funds rate and the overall state of the economy can all impact mortgage rates. You can keep an eye on general market conditions and mortgage rates, and you may be able to lock in a rate for 30 to 60 days after escrow begins if you think rates will rise before your mortgage is funded.
2. Your Credit Score
Mortgage lenders will check your credit reports and scores before deciding on your eligibility and interest rate. The middle of your three scores (based on your three credit reports from Experian, TransUnion and Equifax) may need to be at least 580 or 620 to get approved, depending on the type of mortgage. Having a higher credit score will generally lead to a lower interest rate. If you're applying for a mortgage with a co-borrower, mortgage lenders will consider the lower of the two middle scores.
3. The Type of Mortgage Loan
There are different types of mortgages, including conventional loans, government-insured loans (such as FHA, USDA and VA loans) and jumbo loans. Interest rates can vary significantly depending on the loan type, but there are other factors that could impact your decision as well. For instance, an FHA loan may come with a higher interest rate but require a lower credit score or down payment than a conventional loan.
4. The Loan's Repayment Term
Many mortgages have either a 15-, 20- or 30-year repayment term. Longer-term loans tend to have a higher interest rate, which means you'll pay more overall. But they're also popular because they offer a lower monthly payment.
5. The Loan's Interest Rate Type
You may be able to choose a mortgage with either a fixed or adjustable interest rate. Adjustable-rate mortgages (ARMs) tend to start with a lower rate than fixed-rate mortgages, but the interest rate could increase in the future.
6. The Loan Amount and Loan-to-Value Ratio
The size of your loan and the value of the home you're buying can impact your rates as well. Lenders may consider how much you're borrowing and charge higher rates for especially large or small loans. They may also assess your loan-to-value (LTV) ratio—how the loan amount compares to the home's appraised value—and charge more interest on loans that have a higher LTV ratio.
7. Your Down Payment
A larger down payment could help you qualify for a lower interest rate. Lenders might like to see that you've got skin in the game, and putting more down leads to a lower LTV ratio and loan amount.
You can also avoid paying for mortgage insurance if you put at least 20% down on a mortgage. Unlike homeowners insurance, PMI protects the lender.
8. The Home's Location
Mortgage rates can vary depending on where the home you're buying is located. While you might not choose one location over another based on a small change in rates, it's worth keeping this in mind if you're looking at homes in different states or counties.
9. Mortgage Points and Credits
You may have an opportunity to nab a lower interest rate by buying mortgage points, also called discount points. Each point costs about 1% of the loan amount, and the interest rate reduction can depend on the specific loan offer. Conversely, lenders may pay you lender credits that can offset your closing costs but increase your interest rate.
10. Whether You'll Live in the Home
You might receive a lower interest rate on the mortgage for your primary residence than an investment property. Lenders may also require larger down payments for investment properties because there's a greater risk that borrowers won't make their payments.
11. Your Relationship With the Lender
Some banks have rewards programs or special accounts for customers with high account balances. These programs may come with a variety of benefits, such as waived or lowered closing costs and lower interest rates on a mortgage.
How to Get the Best Mortgage Rate
- Shop around and compare loan offers from different lenders and for different types of loans.
- Don't apply for other credit accounts in the months leading up to your mortgage application.
- Try to improve your credit before applying.
- Save up for a larger down payment.
- Borrow less by buying a less expensive home.
Check and Monitor Your Credit
You can also check your FICO® Score☉ 8 from Experian for free to see where you're at right now. If you're looking to buy a home, you can sign up for an Experian CreditWorks℠ Premium membership that comes with multiple FICO® Score versions, including the FICO® Score 2 from Experian that mortgage lenders tend to use.