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Mortgage Interest Rates: 5 Things That Affect What You Pay

Gina Pogol
The Mortgage Reports contributor

Why Mortgage Interest Rates Vary

Mortgage interest rates are not dictated by the government. They are determined by individual lenders. Lenders set their rates to offset the risk of borrower default, and to build in a profit. They analyze many variables in order to price competitively while still making money.

Here are five factors that affect what lenders charge individual borrowers.

Verify your new rate (Sep 18th, 2020)

1. Your Timeframe

When you’re able to close your loan quickly, you can choose very short-term interest rate locks. Shorter locks tie up the lender’s money for less time and involve less risk. That allows them to charge you less for your loan.

But if you’re dealing with a long escrow, or an even longer new home construction period, it will cost you a lot more to lock. You can pay higher fees to get it done or wait to lock your rate until you’re ready to close.

2. Your Property

Some properties are riskier for lenders to finance than others. Typically, the lowest-risk home is a single family residence being used as the borrower’s primary home.

Condominiums, manufactured housing, and one-to-four unit properties are riskier. Dwellings used as vacation homes or rentals are also associated with higher default rates.

To compensate for the risk involved, lenders generally charge higher mortgage interest rates and impose tougher underwriting guidelines on loans for these properties.

3. Your Profile

Just as some properties pose more risk than others, some classes of borrowers are safer to lend to than others.

The chief concern is your credit rating. Your score can directly impact your interest rate, because it’s been proven that borrowers with lower scores default more often.

For instance, as of this writing, an applicant with a 760 FICO score and a 20 percent down payment can find online 30-year fixed offers as low as 3.12 percent APR. Drop the score to 660, and the lowest APR on offer increases to 3.69 percent.

Verify your new rate (Sep 18th, 2020)

4. Your Loan Amount

Your loan amount affects your mortgage interest rate in two ways – first, nonconforming or “jumbo” mortgage loans come with different rates as compared to “conforming” loans. In 2020, the conforming loan limit for most properties and locations around the U.S. is $510,400.

The two government-sponsored enterprises buy the majority of non-government mortgages in the US, and loans that meet their guidelines often (but not always) come with lower rates.

Your loan amount, in comparison to your property value, also affects your interest rate. Making a large down payment when buying a home, or having significant home equity when refinancing help reduce the lender’s risk and the interest rate you pay.

A refinancing homeowner with a 700 FICO and 40 percent home equity (a 60 percent loan-to-value or LTV) can find offers as low as 3.11 APR. Decrease the equity to 20 percent (80 percent LTV) and the APR is bumped to 3.30 percent.

For this reason, some borrowers make higher down payments or choose “cash-in” refinancing, in which they pay their mortgage balance down to reduce their interest rate.

5. Your Shopping Skills

No matter how high your LTV is, or how low your credit scores are, you can pay less for your mortgage by shopping and comparing rates from several competing mortgage lenders.

A 2012 Stanford University study showed that borrowers who get at least three quotes pay thousands less for a $200,000 home loan.

MIAC, the Mortgage Industry Analytics Corporation, found that on any given day, mortgage rates between competitors vary by about .375 percent. You don’t know if you have the “good” rate or the “bad” rate unless you check with more than one lender.

Whatever the effect the first four factors have on the mortgage rate you’re offered, you can almost certainly do better by employing the fifth factor — comparison shopping.

What Are Today’s Mortgage Interest Rates?

Today’s mortgage rates are low enough that even borrowers with lower credit scores, higher loan amounts and longer time frames can still find great deals. Check out offers from competing lenders and see how well you can do.

Verify your new rate (Sep 18th, 2020)