Articles & Tips
What Determines Your Mortgage Interest Rate?
One of the most important factors in a mortgage refinance transaction is the mortgage interest rate. Many borrowers find the wide range of interest rates that mortgage lenders quote to be confusing. It's particularly frustrating for borrowers to see an intriguingly low mortgage interest rate advertised, and then to find out that they do not qualify for it.
While there are a multitude of factors that come into play to determine the mortgage interest rate associated with a particular mortgage loan, many of them are largely determined by the borrower's personal situation. Since this is the case, understanding what goes into determining a mortgage interest rate can give you insight as to the steps you can take to increase the chances that you will qualify for the best mortgage interest rate.
One of the primary factors that figures into a mortgage interest rate is your credit score. This number is determined by your past credit history, or in other words, what debt you hold and how well you make your payments on that debt. A higher credit score will almost always mean that you will be offered access to a loan with a lower mortgage interest rate, and the reverse is also true: if your credit score is low, don't expect to obtain a mortgage loan with a rock-bottom interest rate. Mortgage lenders are in business to make money, and their experience is that borrowers with good credit ratings are better at paying their mortgages on time. They recognize this by offering these borrowers loans with lower mortgage interest rates.
Another factor in the mortgage interest rate that is associated with a particular loan is the type of property that is covered by the mortgage loan. The best mortgage interest rates are associated with loans in which the owner occupies the property. Interest rates are usually higher for mortgages on second homes or rental properties.
The amount of the loan also impacts the loan's mortgage interest rate. Mortgage amounts that are below $417,000 are called "conforming" loans and usually carry a lower interest rate. Loan amounts above $417,000 are known as "jumbo" loans and feature higher interest rates than conforming loans.
The term of the loan can affect the mortgage interest rate associated with a specific mortgage loan. Since shorter periods of time pose less of a risk to lenders than do longer loan periods, loans with shorter terms carry lower mortgage interest rates as compared with longer-term loans.
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