When consumers shop for home loans, interest rates are often the top concern. They should be — the interest rate you pay determines the ultimate cost of your property. Interest rates affect how much home you’re able to afford.
Interest rates vary among lenders by quite a bit. A study by Mortgage Industry Advisory Corporation (MIAC) found that on average, rates for conforming home loans (those backed by Fannie Mae and Freddie Mac) varied by about .25 percent, and rates of other loans varied by about .5 percent. And that’s average — often, the difference between the best and worst rate online might be as high as two percent! That represents tens or even hundreds of thousands of dollars over a loan’s lifetime!
The charts below show how much interest rate differences can cost over time.
10 Factors that Affect Mortgage Rates
Here are the main factors that influence the mortgage rates you’re quoted. You can’t control all of them, but there are things you can do to make sure you don’t pay any more than necessary.
- Economy – The global financial picture affects all interest rates, including mortgage rates. When the economy becomes uncertain, increased demand for US Treasuries pushes our interest rates lower. Conversely, when the economy heats up, inflation becomes a concern and investors demand higher returns from bonds and mortgage-backed securities. This pushes rates up. In addition, the Federal Reserve uses its power in the marketplace to raise or lower short-term rates, heating or cooling the economy to keep it stable.
- Lender Capacity – Lenders cannot process and fund an infinite number of loans. To control the number of incoming applications, they continually adjust mortgage rates – raising them to slow things down, and lowering them when they wish to generate more business.
- Property Location – Mortgage financing is cheaper in some states than others. Historical loan performance, the amount of competition for business, and laws that make foreclosure easier or more difficult drive differences in rates from state to state.
- Property Use – Primary residences are considered less risky by lenders, so it costs less to finance them. Vacation property and rentals come with higher fees and stricter underwriting requirements.
- Property Type – Traditionally-built single family homes get the best rates. Manufactured housing, condos, co-ops, mixed-use developments and multi-family homes have higher default rates, so mortgage rates are higher for these homes.
- Loan-to-Value – The more money you put down when you buy your house, the lower your mortgage rate will be. For buyers with less than 20 percent down, mortgage insurance can add between .20 and 4.92 percent to their mortgage rate, depending on the down payment size and loan program.
- Credit Score – Applicants with 740 FICO scores could be offered rates about .50 percent lower than those with FICOs of 640.
- Loan Features – The features you choose help determine your rate. Adjustable mortgages (ARMs) can be less risky for the lender – if inflation hits hard, banks don’t want to be getting four percent on their loans and paying out six percent on deposits. For this reason, lenders offer lower rates (in the beginning) to people who choose ARMs over fixed loans. Similarly, loans with shorter terms like 15 years are less risky and so they come with lower rates.
- Points – In general, the more you pay for your loan, the lower your interest rate should be. Paying points for a lower rate is called “buying down” your mortgage.
- Loan Amount – Very high and very low loan amounts can mean higher rates. Extra-large mortgages, called jumbo or super-jumbo loans, usually carry higher rates and stricter underwriting guidelines because they are harder to sell to investors. Very low loan amounts may have surcharges added to them because they won’t otherwise generate enough interest to cover processing costs.
How to Find the Lowest Mortgage Rates
You can’t control all of the factors listed above, but fortunately you don’t have to. Simply request interest rate quotes from competing mortgage lenders, interview a couple of the most competitive and choose the one you’re most comfortable with. To get an accurate, customized quote, provide this information to each lender (but don’t allow them to check your credit report until you;re ready to apply):
- Your loan amount and home value (or purchase price)
- Your estimated credit score
- Property use (rental, primary residence, vacation home)
- Property type (single family, condo, manufactured home, farm, duplex, etc.)
- Property location
Get all mortgage quotes at the same time for the best comparison. Mortgage rates can change several times per day (like stock prices, because they are affected by the economy). Getting quotes online is a great way to obtain them quickly and easily.