The 8 Biggest Factors in Determining the Price of a Mortgage
The biggest factor in determining the price of a mortgage is its interest rate. Mortgage interest rates fluctuate daily and vary from lender to lender, so you can expect a range of offers when shopping around.
There are several factors that influence mortgage rates, and many of them are in your control. Below is what you need to know about what affects mortgage rates.
- What affects mortgage rates?
- The bottom line
What affects mortgage rates?
Here are the eight biggest factors that determine mortgage rates:
Your credit score
The better your credit score, the better your chances of receiving a competitive mortgage rate. For example, a homebuyer with a credit score in the 760-850 range might be quoted a 3.315% rate on a 30-year fixed-rate mortgage, while a buyer in the 620-639 range might be quoted a 4.904% rate for the same loan, according to myFICO.com.
Your down payment
Contributing a larger down payment can help lower your interest rate and save you money. The more money you put down, the less risk your lender takes on, which could motivate them to give you a lower interest rate.
Remember that it’s possible to qualify for a mortgage with as little as 3% down, but mortgage insurance will be added to your monthly mortgage payment if you put down less than 20%. This will negatively affect your mortgage costs.
Your loan amount
If you have a smaller loan amount, you could be charged a higher rate since the lender won’t make as much of a profit from that loan as a larger one. This results in a higher overall cost over the life of your loan.
Your loan term
The length of your mortgage term also matters. Interest rates on 15-year loans are typically lower than those on 30-year loans. At the time of this writing, the average 15-year fixed-rate mortgage had a 3.21% interest rate, and the 30-year fixed had a 3.73% rate, according to Freddie Mac’s Primary Mortgage Market Survey.
Your rate type
The type of interest rate you choose — fixed or adjustable — impacts your rate. An adjustable-rate mortgage usually starts off lower than a fixed-rate loan, but can increase significantly, along with your monthly payment, when the initial fixed-rate period ends and the time comes for the rate to adjust.
If you want to buy down the mortgage rate you’re quoted, you add discount points to your loan, which allow you to pay your lender extra money at closing in exchange for a lower rate. One discount point is equal to 1% of the loan amount.
The property’s location
Mortgage rates vary by state and can vary within a state. A rural area might see higher rates than a major city if there’s less lending competition available, for example. Even the type of property may have an impact, as residential interest rates for first homes are also usually lower than comparable rates on investment properties.
In terms of how overall mortgage rates are set, bond yields, inflation, the Federal Reserve’s policy making decisions and even the job market can all have an impact on their direction. For a deeper dive into how the economy impacts mortgage interest rates, see our explainer here.
The bottom line
The biggest factor in determining the price of your mortgage will often boil down to your unique situation. You can’t do much about the global economy or the state in which you buy your home — but you do have control over your credit rating, your down payment and how much you choose to borrow. And while you don’t influence the policies of mortgage lenders, you can choose which ones you prefer to do business with.
Understanding what affects the mortgage rates you’re offered can help you get a better deal. Individual mortgage lenders handle these variables in different ways, and interest rates will vary because of that fact.
That’s why a list of advertised interest rates isn’t very helpful when you shop for a mortgage. Only a custom quote from a lender that has all of the necessary information can be useful to you. If you want to be sure that the loan you’re offered is competitive, you’ll need to compare several quotes from competing lenders.