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Factors That Affect Mortgage Interest Rates

by Ryan Guina

After the crash of the housing and mortgage industries, lenders are taking serious issue with potential borrowers to reduce the risks of defaults. Strict measures have been put in place to verify a borrower’s financial abilities before any mortgage loan is a approved. Not only are people finding it harder to secure a mortgage approval, it is also proving more difficult to get a good interest rate on the mortgage.

Why a low mortgage rate matters. Securing a low interest rate on a home loan is important because it will dictate how much you have to pay monthly and how much you will need to pay in finance fees over the life of the loan. A high rate might mean you are paying more in interest for you home than you are on the actual purchase price. Getting a good interest rate will depend on many factors, many of which are within the borrower’s control.

How To Get a Better Mortgage Interest Rate

There are many factors that go into your mortgage application – these are some of the factors that will have the greatest impact on your overall mortgage interest rate.

A Solid Credit Score Can Save You Thousands

One of the first things a lender will do is pull a copy of your credit report and credit score. You should do the same before applying for a loan. Lenders are now looking for credit scores of 720 or higher in order to provide the best interest rates on a loan. If you credit score is lacking or you have a history of late payments, you may not only get a high interest rate, you may be denied a mortgage loan.

On the flip side, having a mortgage can increase your credit score because it shows a regular payment history. You may be able to use this to your advantage to refinance to lock in a lower interest rate.

This table show how a good credit score can affect your mortgage rates (example: 30 year fixed mortgage at $300,000):

FICO® score APR Monthly Mortgage Payment
760-850 4.645% $1,546
700-759 4.867% $1,586
680-699 5.044% $1,619
660-679 5.258% $1,658
640-659 5.688% $1,739
620-639 6.234% $1,844

Get a copy of your credit score: You can check your credit score by following these instructions: FICO Credit Score.

Increase Your Down Payment

The more money you pay down, the less you have to borrow. Your interest rate can be reduced based on the amount of money you put up as a down payment. Ideally, lenders are looking for 20% or more down on the purchase price of the home. Making a down payment of 20% or greater can also help you avoid Private Mortgage Insurance (PMI) which generally costs several hundred dollars per year.

Length of Mortgage Loan

If you opt to take a 15 year mortgage versus a 30 year mortgage, your lender may be able to provide a better interest rate. If you can afford to pay off a mortgage loan in a shorter period of time, take the option.

Borrower’s Income

Your lender will verify your income and calculate the amount of mortgage you can afford to pay based on your other financial obligations. Your ability to pay back the monthly mortgage payment will be affected by how much money you make. A lowered-interest rate may be possible if the ratio between your debts and income is balanced and you can prove you can afford monthly payments.

Type of Mortgage – Fixed or Adjustable

In recent years, many borrowers opted for an adjustable rate mortgage because they paid smaller monthly payments for several years and then were responsible for making a larger ballooned payment later in the mortgage. This proved to be part of the reason many homes fell into foreclosure as borrowers could not afford the lump sum payment. A fixed-rate mortgage means all payments through the life of the mortgage are the same once an interest rate is locked in at the time of loan commitment. The amount of your mortgage interest rate will vary based on your financial history, the market, and the type of interest rate you are pursuing.

Qualifying for lower mortgage interest rates: To wrap it up, if you want to qualify for the lowest mortgage rates, then you need to have a good credit score, borrow less money in conjunction with a 20% or greater down payment, get a shorter loan period, provide proof of income, and get a fixed rate mortgage.


Published or updated January 6, 2012.
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{ 6 comments… read them below or add one }

1 Jarhead

If you are a veteran you can save on PMI by using a VA loan. The rate might be slightly higher than a non VA loan (.25-.50) but if you do not have the 20% to escape PMI it might be worth it.

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2 Ryan

Very true, Jarhead. And lately, some lenders are actually offering VA Loans at lower rates than conventional loans. My wife and I bought a house in April using the VA loan, because the interest rate was lower than a conventional loan (we also put down over 20%, so we could have qualified for either loan). Refinancing a VA Loan is also a lot easier, as you can do a Streamline Refinance. It’s a lot faster and cheaper than refinancing a conventional mortgage.

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3 Charles

since the mortgage rates are so low these days, i’ve been seriously thinking about refinancing again. But since the value of my home has depreciated so much that I don’t have 20% equity anymore, I’m not sure how that would affect refinancing.

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4 Ryan

Charles, the 20% equity number can play a big factor for interest rates. You can inquire, but you may find that you are better off where you are. Then again, it doesn’t hurt to ask. You may save yourself a few hundred bucks per year, or more! :)

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5 Doug Warshauer

Good overview, Ryan. What do you think is the best way to shop for a mortgage? Since different lenders have different standards, finding the right lender seems like it could also have a significant affect on your interest rate.

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6 Ryan

Doug, there are thousands of lenders out there. I think the best way is to just shop around. I would try locally, because some credit unions and small banks offer great service and competitive rates, and may be less likely to package your loan and resell it down the road. Then again, some of the major companies offer great rates and customer service as well. You can try going straight to the lender or contacting a loan center such as Ditech.com or Lending Tree to get multiple mortgage rate quotes and let banks bid for your mortgage.

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