What Affects Your Mortgage Interest Rate?
When you're shopping for a mortgage, one of the most important numbers you'll hear about is your interest rate. It plays a huge role in determining how much you’ll pay for your home over time. But what actually affects this rate?
Whether you’re a first-time homebuyer or considering a refinance, understanding the factors that influence your mortgage interest rate can help you make smarter financial decisions—and potentially save thousands of dollars over the life of your loan.
Here are the key factors lenders consider:
1. Your Credit Score
Your credit score is one of the most significant factors. The higher your score, the lower the risk for the lender—and the better the interest rate you’re likely to receive.
Excellent (760–850): You’ll likely qualify for the lowest rates.
Good (700–759): Still very competitive, but slightly higher.
Fair (620–699): You may face higher rates and limited options.
Poor (<620): Approval may be challenging; rates are typically higher.
Tip: Before applying, check your credit report for errors and take steps to improve your score if needed—like paying down debt and making on-time payments.
2. Loan Type
The type of loan you choose affects your interest rate. Common mortgage types include:
Conventional Loans: Rates depend heavily on your credit and down payment.
FHA Loans: Easier to qualify for, but may carry slightly higher rates or mortgage insurance.
VA Loans: Available to eligible veterans, often with very competitive rates and no down payment required.
USDA Loans: Designed for rural buyers, typically offer low rates with little or no down payment.
3. Loan Term
Generally, shorter-term loans (like a 15-year mortgage) have lower interest rates than longer-term loans (like 30-year mortgages). However, your monthly payments will be higher with a shorter term, even if you save on interest overall.
4. Down Payment Amount
The more you can put down upfront, the less risky the loan is for the lender.
20% or more: You’ll often get better rates—and avoid Private Mortgage Insurance (PMI).
Less than 20%: You may still qualify, but expect higher interest rates and PMI.
5. Loan Amount & Property Type
Loan size matters: Jumbo loans (above the conforming loan limit) usually come with higher rates.
Property type: Interest rates can vary depending on whether the property is your primary residence, a vacation home, or an investment property. Lenders typically charge more for second homes and rentals.
6. Economic Conditions
Some factors are outside of your control. Interest rates rise and fall based on broader economic trends, such as:
Inflation
Federal Reserve policy
Bond market performance
Global economic events
While you can’t control the market, you can time your mortgage strategically. If rates are expected to rise, locking in a rate sooner could save money.
7. Points and Fees
You can choose to buy mortgage points—a form of prepaid interest that reduces your rate in exchange for an upfront fee. This can be worth it if you plan to stay in your home long enough to break even on the cost.
Final Thoughts
Your mortgage interest rate is influenced by a mix of personal, financial, and market factors. The good news? Many of them are within your control.
806 Mortgage Is Here To Help!
806 Mortgage can answer any more questions you may have about mortgage rates while guided you through the homebuying process while getting you an excellent rate on your mortgage. Reach out today and let us help you find the home you have always dreamed of!
