How Are Mortgage Rates Determined?

Every rational mortgage shopper always seeks to get the lowest interest rates in their mortgage loan so that monthly payments can be as low as possible. However, due to lack of information on how mortgage rates are determined, many homeowners always go with the rates offered by their mortgage broker or bank.

Rarely do mortgage shoppers inquire on how mortgage rates are determined or even take time to research the rates of a mortgage lender. It is wise to be informed on how mortgage rates move and why as this will help you in your negotiation with lenders to ensure you get a good deal.

How are mortgage rates determined? Some of the key factors that determine your mortgage rate that you should know include:

Credit Score

Credit score is a number used by lenders to try to predict your probability to completely payoff loans advanced to you. Lenders use your credit report to calculate your credit score. Credit report shows your payment history for all your loans and credit cards. The higher your credit score, the higher the probability of getting a lower interest rate since it shows you are not likely to default.

It’s advisable to get your credit report, get errors fixed and pay off debts that can help improve your credit score before visiting your mortgage provider.

Home Price and Loan Amount

Your loan amount is the difference between your home price and your down payment. In general, interest rates will be higher if you take a particularly small or big loan.

When shopping for a mortgage, it’s wise to first know the prices in your location of interest (visit real estate websites).

Down Payment

Paying a high down payment will lower interest since lenders face a lower level of risk when a homeowner has a higher stake in the property.

In general, putting a down payment of 20 percent or more will ensure you get a lower mortgage rate.

Home Location

Many mortgage providers have varying pricing depending on location (state of residence). Mortgages in rural areas may be more complex, hence large lenders may not provide their services in most rural areas.

Loan Term

This is the time you take to repay your loan. Traditionally, the shorter the loan term, the lower the interest rate and overall cost are lower, although monthly payments will be higher. Your choice of loan term will therefore affect your interest rates and interest costs.

Interest Rate Type

Interest rates are of two basic types which are fixed and adjustable. For a fixed interest rate, your rate will not change over time. However, an adjustable rate will have an initial fixed period; at the end of which they will fluctuate (go up and down) depending on the market. Although you can obtain a low initial interest rate in the case of an adjustable rate loan, the rate might rise significantly in the future.

Loan Type

Loans are placed in broad categories which consist of FHA, VA and conventional loans. Your loan type choice will have a significant effect on your mortgage rate.

Level of Economic Activity

Mortgage rates are highly affected by economic activity. Low economic activity will lower mortgage rates while high levels of economic activities will force the rates higher.