10 factors that can affect your mortgage interest rate

Who doesn’t want to get a mortgage at a low-interest rate? One of the biggest investments in your life is buying a property. If you can buy it by paying less interest, then nothing can be better. Most people think that the lender determines the interest rate of your mortgage. But the truth is that you can control the interest rate too. Saving a fraction of interest can lead to saving thousands of dollars in the end. So, you should shop around before getting a mortgage. You should know about your loan choices. The interest rates on mortgages are not standardized everywhere. The rate varies from one lender to another. There are many factors that affect the mortgage interest rates. These are discussed below.

Credit score

A credit score is one of the most important factors that affect your mortgage interest rate. When evaluating your credit score, the lenders consider your payment history, your credit utilization ratio,   length of credit history, credit account mix, etc. The reason to check all these is that the lender wants to make sure that you are someone who will be able to pay back the mortgage amount. They will provide mortgage at a low interest rate to those with high credit score. So, before you apply for a mortgage, you should study your credit report thoroughly and see how you can improve the score.

Loan term

If you have a shorter loan term then it is possible that your mortgage interest rate will be lower. For example, if you apply for a 30-year loan, then your interest rate will be higher compared to that of a 15-year loan term. So, shorter loan term means you will have to pay less amount overall.

Fixed rate vs adjustable rate

There are two types of interest rates to choose from: fixed and adjustable. If you have a fixed rate then you will pay the loan at that rate for the entire loan term. But adjustable mortgage rates offer lower interest rate than the fixed rate for three, five or seven years. After that, they adjust the rate and charge higher. The adjustable mortgage rate is risky if the interest rates increase during the early periods when you are actually supposed to have lower interest rates.

Type of property

The mortgage interest rate depends on the type of property you are buying. There are risks associated with buying some properties. For example, properties that you buy as second homes have high interest rates. Single-family homes have the lowest interest rates.

Loan amounts

The amount of loan you are applying for may affect your mortgage rate. For example, if your loan amount is low, the lender will provide high interest rate so that he can make a decent profit on this small loan amount. Similarly, if you apply for a large loan amount, the deal becomes risky so the lender will charge more. Generally, in the U.S, if your loan is under $100,000 or over $417,000, you will be charged a higher interest rate. So, when you are shopping for homes, you should check the price range before applying for a mortgage.

Expected down payment

The amount of down payment can significantly affect your mortgage interest rate. If you make more down payment, then your interest rate will be lower. So, for example, a 20% down payment will ensure a lower mortgage interest rate. However, it varies from one lender to another. Some lenders may be willing to give you a low mortgage rate even at a 5% or 10% down payment.

Loan type

There are different types of loans available besides bank loans, like FHA and VA loans. The FHA loan (which stands for Federal Housing Administration) offers loan at 3.5% down payments. The interest rates they offer is also very low compared to the conventional loans. But with these loans, you will need to buy private mortgage insurance. This insurance protects the lender from any kind of default. So, this is something extra that you need to pay every month along with your mortgage payment.

Location of property

The mortgage interest rates depend on the location of the property you are willing to buy. If your property is located in a healthy housing market, your interest rate will be lower. But if you are buying a house in rural areas (where properties are very cheap) or near water (where properties are very expensive) then your interest rate will be high.


Mortgage interest rates are offered with different ‘points’.  These points can decrease your interest rate if you pay some upfront fee. Getting one point means deducting one percent of interest. If you pay points at closing, then your lender will offer you a lower interest rate.

Monetary policy

The Federal Reserve’s monetary policy can affect your interest rate. When the Federal Reserve increases the money supply, the federal fund’s rate gets lower, so the interest rates decrease. If the money supply is tightened, the interest rate will be higher.

All these factors just discussed affect your mortgage interest rate. The rate is mainly based on how risky it is to give money to the borrower. It also depends on the competition; for example, if the lender wants more borrowers, he will lower the interest rates. You should shop around before deciding to apply for a mortgage. Try to get quotes from as many lenders as possible and see how you can negotiate a lower interest rate.