Three Things That Influence Mortgage Rates
Navigating mortgage rates can often feel overwhelming. Mortgage companies don’t always provide clear information about closing costs and lender fees, and rates can change frequently—sometimes even within a single day. Several factors determine the interest rate you're offered, and understanding them can be tricky. Here are three major factors that influence your mortgage rate:
Your Credit Score and Financial Health
Your credit score and overall financial situation are key factors in securing a favorable mortgage rate. The underwriting process, though stressful, helps lenders assess the risk of lending you a large sum of money for a home purchase.
A strong credit score and solid financial health make it more likely you’ll receive a lower rate, potentially saving you thousands over the life of the loan. It's worth taking the time to improve your credit and get your finances in order before applying.
Some of the factors considered during underwriting include:
Debt-to-income ratio
Average of your credit scores from the three major bureaus
Any negative marks on your credit report
Job history, including length of employment, industry stability, and employment gaps
Self-employed? Lenders will review your last two years’ tax returns to assess income
Details of Your Home Purchase
Lenders will evaluate the specifics of the property you're purchasing to determine your rate, as these details help assess the risk associated with the loan. They won’t finalize your loan until they fully understand the home’s value and any potential risks.
Key factors your lender will consider include:
Location
Home price and condition
Property type (e.g., primary residence, secondary home, single-family, multi-family)
Loan amount
Down payment (higher down payments often lead to lower rates)
Sales contract details, including earnest money and contingencies
Understanding how your home’s characteristics can affect your rate is crucial. Be sure to discuss these details with your lender to get a clearer picture of their impact on your mortgage.
Technical Loan Details (Terms, Points, and Fees)
The specifics of your loan also play a significant role in determining your interest rate, including:
Closing costs and lender fees
Fixed vs. adjustable-rate mortgages
Balloon payments
Upfront points and fees
Loan term (the length of time you’ll have to repay the loan—rates vary for a 30-year vs. 15-year mortgage)
Type of loan (e.g., conventional loans vs. government-backed loans like FHA, VA, or USDA)
As a homebuyer, it’s important to understand these elements and ask questions if anything is unclear. A reputable lender will be transparent, taking the time to explain all aspects of your loan and interest rate while providing resources to guide you through the process.
