What Affects Your Mortgage Rate?

You’ve found your dream home and you’re ready to take out a loan to purchase it…

Now comes the hard part — the financial aspect of home ownership!

Every potential homeowner can do a little research and find out what mortgage rates are, but odds are you don’t know how the bank calculates the rate they’re willing to give YOU.

These 7 factors will help you understand why your lender has offered you the rate that they did:

1. Your credit score

One of the first things the bank is going to look at to determine if you qualify for a loan — and if so, at what mortgage rate — is your credit score.

Your credit score is a three-digit number that basically sums up your past and current debts — and your track record of paying those debts on time. Lenders consider a credit score above 700 as ‘good credit’ and are more likely to give you a loan if your score is above this benchmark number. However, most private lenders will work with you even if your credit score is slightly below 700, too.

How do you find out what your credit score is?

Head to one of the three major credit report agencies — Experian, Equifax, or TransUnion — at least one year before trying to buy a home. That way, you can clear up any mistakes.

2. The amount of money you are trying to borrow

Each year, nationwide guidelines are established for the conforming limits. That’s a fancy way of saying that there’s a range of typical mortgage amounts for that year. If the amount you want borrow fits into that window, you’re likely to get a better rate than if it’s higher or lower.

For example, if banks anticipate the average person purchasing a home that year will want to borrow between $150,000 and $350,000, your rate is likely to be lower if your loan is somewhere in between those two numbers. If you need a $500,000 mortgage to buy your home, count on paying a higher rate.

3. The length of your loan

If you are planning on taking out a 15-year mortgage, it will be cheaper than a 30-year mortgage — simply because you are taking less time to pay the money back.

The less time you take you pay back your loan, the less interest you have to pay, and the less interest calculated into the original loan, the lower your mortgage rate will be.

4. Your down payment

Just like when you buy a car, the money you put down up front, the less interest you’ll have to pay on the remaining amount.

So, if you put down 20% (and only have to borrow 80% of the purchase price), you’ll get a better mortgage rate than if you only put down 10% (and have to borrow 90% to pay for the house).

5. Whether you go with a fixed rate or an adjustable rate mortgage

The good thing about fixed rate mortgages is that the rate never changes. But if you decide to get an adjustable rate mortgage, your rate will likely be lower than the national average at first, during your introductory (or “teaser rate”) period.

Adjustable rate mortgages increase at predetermined times throughout the life of the loan, and often end at a higher rate than a fixed rate mortgage.

6. The fine print

Some lenders will advertise “freebies” in order to get more customers in the door. They may do things like pay for your property value appraisal or pay for your closing costs.

But, as you may know by now, nothing in life is free! Just because you don’t pay for that stuff up front doesn’t mean it isn’t included in your mortgage payments later. In fact, you’ll likely have a higher rate to make up for all of those “freebies”!

7. The economy

The healthier it is, the higher your rate will be. Right now, mortgage rates are incredibly low because lenders are trying to get more buyers in the door.

What Affects Your Mortgage Rate?