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7 Factors that Influence Your Mortgage Rate

One of the biggest challenges in the home buying process is figuring out what your mortgage interest rate will be. Ideally, you want your mortgage rate to be as low as possible. A high-interest rate can put tens of thousands onto the cost of your loa...

One of the biggest challenges in the home buying process is figuring out what your mortgage interest rate will be. Ideally, you want your mortgage rate to be as low as possible. A high-interest rate can put tens of thousands onto the cost of your loan. 

However, many factors can influence your rate, so it’s worth considering the following things before applying for your mortgage. 

We’ll also cover some of the things you can do to improve your chances of getting a better interest rate. There will be some factors that you can control and change, but there will be others such as inflation and the housing market which you simply have to work around. But doing whatever you can to reduce your interest rate will help you in the long run.

1. Your credit score

One of the first things that a lender will look at is your credit score. This is one of the clearest ways a lender can assess your ability to repay the mortgage. A good credit score can save you a significant amount of money thanks to lower interest rates.

2. Down payment

Generally, the larger the down payment, the lower your interest rate. That’s because lenders believe you to be a lower risk to lend to. After all, it means you already have more stake in the property. 

3. Home price and loan amount

Interest rates are also affected by the price of the home and the total loan amount. That also includes house closing costs, which may be included in your mortgage loan depending on the type of loan.

4. Loan type

There are several different types of loan, for example, USDA, FHA, conventional, and VA loans. Rates can vary significantly between these loan types so it’s worth speaking with multiple lenders. 

5. Interest rate type: Adjustable vs. fixed rate

There are two types of interest rates, fixed and adjustable. Fixed rates don’t change over time, whereas adjustable rates do. Adjustable rates have a fixed-rate period initially, which is usually lower, after which the rate can go up or down based on the markets.

6. Economic conditions

While there’s not much you can do about the economy, rates can vary based on the demand for housing, the demand for mortgages, the federal reserve rates, how much you can borrow, inflation, and other economic conditions. Being aware of these various factors can greatly help you during your home buying process.

7. Discount points

Your rate could also be influenced by discount points, which is interest paid upfront. Make sure you ask your lender whether you’re paying these points and whether you can buy your rate down.

What homebuyers need to provide during the mortgage process

Lenders want to see a lot of information about your current financial health before they will accept you for a mortgage. This also helps them calculate what interest rate to give you and also the maximum you can borrow for your home purchase.

Documents and evidence to supply the lender will include:

      • Pay stubs
      • Proof of any other source of income
      • Bank statements
      • Tax returns
      • ID and social security number
      • Details on current debts, e.g. student loans
      • Information about any assets or homes you already own

How to improve your chances of a lower rate 

Improve your credit score

Those looking to take out a mortgage should look at their credit score first. If there’s anything you can do to improve your score, clear debts, or correct any errors on your report, this will boost your chances of getting a better rate. 

Pay the highest down payment you can afford

This has two benefits. First, the lender will perceive you as less of a credit risk. It also means you’re taking out a smaller loan which will usually mean a lower interest rate. Lenders will give their best deals to those putting down 20% when compared to those putting down just 5%-10%. Keep in mind that if you’re putting down less than 20%, you’ll have to pay private mortgage insurance (PMI), which will add to your monthly payment.

Shop around and do your research.

Don’t just go with the first lender you speak with or even the one your friend recommends. Do some extensive shopping around to find the best possible deal. 

One way to make this easier is to enlist the help of a broker who will help you find the best deal. It may cost a little more initially, but a broker could shave thousands off the cost of your loan.

Try out mortgage calculators

While they may not give you an accurate picture of exactly how much your interest rates will be, mortgage calculators can give you a good idea of what to expect. 

This will help you get an idea of how much a bank will lend to you, and what type of down payment you will need to meet your ideal house budget. 

When applying for a loan, there are definitely some simple steps you can take to ensure you get the lowest rate possible. With the market always changing, and house prices increasing in most areas, anything you can do to reduce interest rates is going to mean significant savings. 

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