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What Determines Your Mortgage Rate?

how are mortgage rates determined

If you follow mortgage interest rates at all, you know mortgage rates are a moving target. There’s a reason mortgage purchaser Freddie Mac surveys lenders to determine an “average” interest rate. Although interest rates are based on factors like how much the Federal Reserve charges banks to borrow money, lending institutions are free to set their own mortgage rates.

Mortgage interest rates vary based on a number of factors, including:

• The length of the mortgage loan, such as 15 or 30 years.
• The type of mortgage loan – fixed rate or adjustable.
• The amount of the loan; non-conventional “jumbo” loans of $417,000 or more carry higher interest rates.
• Your credit score.
• The ratio of the amount you want to borrow relative to the value of the home.
• Whether you are buying or refinancing a primary residence or a second home or investment property.

Here’s one way to think about who is eligible for the best mortgage interest rates: If you have a very good to excellent credit score, have at least a 20 percent down payment, and are financing a primary residence, you have an excellent shot of getting the lowest advertised mortgage rates.

Other mortgage rate factors
In general, interest rates on 15-year loans are a little lower than on 30-year loans. The rate comparison between a fixed-rate mortgages and the initial rate on an adjustable-rate mortgage is a little trickier. Adjustable-rate mortgages come in many sizes and shapes, and many changes have been made since the subprime mortgage crisis hit. Adjustable-rate mortgage interest rates are now slightly higher than fixed-rate mortgages.

Another factor is geography. Mortgage interest rates vary from state to state, and even city to city. Local and regional banks will advertise their lowest rates on their Web sites.

Keep in mind that even those borrowers who meet all the top lending criteria often have to pay discount points to get the lowest mortgage rates. The LendingTree Discount Points Calculator can tell you how long it will take you to recoup the cost of the discount point through lower interest rates and lower mortgage payments.

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