6 Factors That Affect Your Mortgage Rate

What Factors Influence My Mortgage Rate | LendPro

The scary thing about mortgage rates is that they will continue to impact you for decades to come. Make the least optimal choice – and you’ll be literally paying for it years from now.

So, it’s important to learn the mortgage rate factors. If you know the factors affecting mortgage rates, you can stay in the housing loop and maneuver with your interests in mind. Today, we will cover the six mortgage rate factors and how to achieve the ideal circumstance for each.

1. Credit Score

An excellent credit score can’t solve all your problems, but it can certainly make life easier. Your credit score is one of the biggest mortgage rate factors because lenders tend to gauge your reliability through that score. In general, those with higher credit scores will receive lower interest rate offers than those with lower credit scores.

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What’s the ideal credit score? Credit scores beyond 700 are generally good, but we recommend aiming for at least 760. With a credit score of 760 (or above), you’ll be a strong contender for the best public mortgage interest rates out there.

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Steps to achieve the ideal credit score: Improving your credit score may require both short-term remedies and long-term lifestyle solutions. Investopedia and Experian have great resources to help you raise your credit scores.

2. Down Payment

The larger the down payment, the lower interest rates tend to be. Individuals that provide a larger down payment are assessed as being less risky in the eyes of lenders. This prompts lenders to offer more competitive rates and leniency in terms of insurance.

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What’s the ideal down payment? Putting at least a 20% down payment is a great start to getting approved for a decent loan and avoiding mortgage insurance fees. If you are financially able to go higher after carefully assessing all costs, we recommend that you do to reduce overall costs and insurance fees.

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Steps to achieve the ideal down payment: Saving up for a down payment can take time and there are numerous ways to do it. Our biggest advice is to start now and create a savings budgeting schedule that you can stick to.

3. Home Location

Lenders may offer different mortgage rates depending on which state the home is located. That’s because the cost of living and conducting business is simply larger for some states than others. Lenders will also need to account for loan risk and processing fees based on the average house price and loan size in the area.

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Is there an ideal home location? This TIME article highlights the best and worst 5 states based on average mortgage rates. 

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Steps to choose the ideal home location: Once you have a general ballpark of what state you want to buy your home in, the next step is to use the CFPB’s Explore Interest Rate Tool. This tool will give you a sense of local mortgage rates depending on a variety of factors.

4. Mortgage Loan Length

Going back to the idea of risk, shorter-term mortgage loans are accompanied by lower interest rates since there’s less time for a borrower to default.

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What’s the ideal mortgage loan length? Ideally, the shorter, the better. Remember that a shorter-term mortgage loan requires higher monthly payments. 

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Steps to choose the ideal mortgage loan length: You will want to assess your current financial situation and the long-term future. Then, budget and plan out your expenses to see if it is possible to opt for a short-term mortgage loan.

5. Mortgage Type

There are numerous mortgage types (e.g. conventional, USDA, FHA, VA, etc) available on the market – all with their own eligibility and interest rate requirements. 

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Is there an ideal mortgage type? There is no one-size-fits-all mortgage type. Depending on your situation, you may benefit much more from one type of mortgage over another. You can read more about our loan types here at LendPro Mortgage. 

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Steps to choose the ideal mortgage type: Research on the various mortgage types is fundamental to choosing the right one. We recently wrote a blog about the different mortgage types that can point you in the right direction.

6. The Economy

While out of our control – the general economy’s rate of growth, inflation, and other conditions play a critical role in how mortgage rates behave.

‍When is the right time to buy a mortgage? Economy-wise and historically, buying a mortgage during times of recession will yield the best rates. These times are when demand is low, supply is high, and mortgage rates are more affordable.