the interest rates for your mortgage are determined by seven factors

So how does a mortgage company determine what interest rate you get?  Its a question that almost everyone asks, so you aren’t alone!  While you are out shopping for the lowest interest rate it would be smart if you understand what factors they are taking into account. I think we should start at the beginning so you can put yourself in a lenders position. 

Per the almighty Wikipedia: “An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.

Did ya get all of that?  Clear as mud... I know.  But hopefully you understand that your rate is charged by the establishment lending the money we can go over the rest of the factors that contribute to what interest rate you get.

Imagine when you go to get a loan on a home you want to purchase you will at some point be asked by your lender to lock your interest rate for your loan. This is the cost of borrowing money for a home. Interest is combined with principal to determine monthly mortgage payments. The longer a mortgage is, the more you will pay in interest when you have finally paid off the loan.

According to the Consumer Financial Protection Bureau (that exists to protect you) the Major components that a lender uses are:

  • Credit Scores: In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores.
  • Home Location: Many lenders offer slightly different interest rates depending on what state you live in.
  • Home price and loan amount: Homebuyers can pay higher interest rates on loans that are particularly small or large. The amount you’ll need to borrow for your mortgage loan is the home price plus closing costs minus your down payment. Depending on your circumstances or mortgage loan type, your closing costs and mortgage insurance may be included in the amount of your mortgage loan, too. 
  • Down Payment: generally, a larger down payment means a lower interest rate,
  • Loan Term: n general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments.
  • Interest Rate Type: Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly later on. Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market.
  • Loan Type: Rates can be significantly different depending on what loan type you choose.

The CFPB (Consumer Financial Protection Bureau) also notes that there is “One more thing to consider: The trade-off between points and interest rates: As you shop for a mortgage, you’ll see that lenders also offer different interest rates on loans with different “points.”

Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs.

  • Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.
  • Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate. Keep in mind that some lenders may also offer lender credits that are unconnected to the interest rate you pay—for example, a temporary offer, or to compensate for a problem.”

One more piece of the home buying puzzle has been unveiled. Now when you go to buy a home you can better understand how to get the best rate you can, and why you are getting the rate you are getting.  Making sure you are working with a lender that your Realtor has worked with before or that you trust is typically best practice. 

I know that this is a lot to swallow. As always, reach out with any questions or concerns. Im here to help!

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