12 Factors That Determine Your Mortgage Interest Rate

Your transaction type and individual financial profile influence your borrowing costs. The following 12 factors are used by lenders when determining your mortgage interest rate: 

1. Credit Score

Borrowers with higher credit scores receive better interest rates. A borrower with an 800 mid-score can have a rate as much as 1.5% lower than a borrower with a 640 mid-score.

2. Down Payment

A larger down payment, such as 30-40%, can lead to a lower interest rate.

3. Discount Points and Origination Fees

Borrowers can pay for discount points and origination fees to buy down their interest rate, making loans with discount points lower than zero-point options.

4. Property Use

Primary residences typically have lower interest rates than second homes and investment properties.

5. Property Type

Single-family homes and condominiums with 25% or more in a down payment or equity have lower interest rates than condos with less than 25% down, multi-family dwellings, and co-ops.

6. Loan Term

Shorter-term, fixed-rate loans have lower interest rates than comparable longer-term programs. For example, 15-year fixed-rate loans have lower rates than 30-year fixed-rate loans. In certain interest rate markets, Adjustable Rate Mortgages (ARMs) of the same term can have lower rates than fixed-rate loans.

7. Loan Amount

Conforming loan amounts have the lowest interest rates. These amounts are the average rates that Fannie Mae and Freddie Mac publish weekly. High Balance conforming loans vary depending on the county the property is located in, and tend to have higher rates than conforming loans. Loans in excess of the Fannie Mae High Balance loan limit are considered jumbo mortgages. Jumbo interest rates can be equal to or higher than the High Balance conforming rates. Even though smaller loan sizes are still considered to be conforming loans, loan amounts under $150,000 can have higher interest rates when compared to a $400,000 loan

8. Loan Types

Conforming FHA, VA, USDA, and 203K loans all offer different interest rates.

9. 1st and 2nd Combo Loans (Piggybacks)

Loans with a concurrent 2nd mortgage can have higher rates than a loan with 20% down or a loan with private mortgage insurance (PMI).

10. Rate Lock Period

Interest rates can be “locked-in” or guaranteed for a period of time to coincide with the closing date. Rate-lock periods can vary from 30 to 60 days. Certain parts of the country close home purchases in under 30 days, whereas other parts of the country see periods of 60 days or longer from contract to close. Typically, the longer the lock period, the higher the rate or fees. Refinances tend to be locked for 45-60 days, and purchase loan lock periods vary depending on the location of the property.

11. “No Cost” Refinances

No-cost refinances have higher rates than refinances where the borrower pays the customary closing costs.

12. Purchase-Money Mortgages, Rate-and Term Refinances, and Cash-Outs

Purchase-money mortgages have lower interest rates than rate-and-term refinances. When borrowers increase their loan amounts or consolidate a first and second mortgage, this is deemed a cash-out refinance. Cash-out rates are usually higher than rate-and-term refinances. 

Reliable lenders won’t offer you a one-size-fits-all interest rate while recognizing that everyone’s financial situation is unique. Speak with your trusted LendGen loan officer today to determine the best loan program for your needs.