Understanding Mortgage Interest (Interest Rate Factors)

Lenders consider a wide variety of factors when setting your mortgagte interest rate, including your credit, loan term, down payment, the price of the home, whether it's a fixed or adjustable rate mortgage, and the loan type.   Using a mortgage calculator will provide you with an estimated monthly mortgage payment.

1.  Credit Score - Your credit score is based on your credit and tells lenders how "safe" of a borrower you are.  The most commonly used credit score is FICO and ranges from 300 - 850.  The higher your credit score, the better chance you have to qualify for a lower interest rate.  

2. Home Price and Loan Amount - The more money you need to borrow for your loan, the higher the interest rate will be. Lenders take a risk when loaning money so the larger the mortgage, the higher the interest rate may be.  Your credit score and the amount of money you need to borrow will greatly dictate which you loan you will qualify for. 

3. Down Payment - Your down payment is the amount of money you are paying upfront to buy the property.  The more down payment you have, the lower the interest rate will be on your mortgage since the lender is not having to take on as much risk.  If your downpayment is less than 20% of the purchase price, you will need to buy private mortgage insurance (PMI) and pay those premiums as part of your mortgage payment.   

4.  Loan Term - The longer the length of your loan, the higher your interest rate may be.    

5.  Interest Rate Type - Defined by whether your mortgage is fixed or adjustable.   In the beginning, lenders charge higher rates on fixed-rate mortgages.  

6.  Loan Type - Government-backed loans typically charge lower rates vs conventional mortgages; however, FHA loans can be more expensive once you factor in other fees like mortgage insurance.  

There are additional factors that lenders consider when determining your interest rate but these factors will give you a quick idea of what they look at and what you can do to ensure that you qualify for the best rate possible.