What Determines Your Mortgage Rate?

Everyone is talking about interest rates right now, and with good reason. A couple of years ago, we saw interest rates hit historic lows as the Federal Reserve tried to stimulate the post-pandemic economy. But then inflation happened, and now the Federal Reserve has raised interest rates. While things are normalizing a bit, there are still a lot of questions around what makes you eligible for the best rates. 

As a buyer, you should do everything you can to get the best interest rate possible. But remember: you can always refinance to a better rate down the road. You may have heard the expression, "Marry the house, Date the rate." Essentially, this means that getting a good sales price is the most important factor. Rates will continue to shift, and you can refinance when they are in a place you prefer. As long as the monthly payment is in your budget, try not to fixate on the interest rates. These are one thing you can adjust later on. But how are you actually supposed to get a good rate in the first place?

For many buyers, the mortgage rate can seem like a black box that just spits out a number (your interest rate) and you’re stuck paying it each month. But, there are several factors your lender considers when determining your mortgage rate. Let’s go over the top 4 things that impact your rate.

1. Your Credit Score: Your credit score basically tells the lender how likely you are to be able to repay the entire home loan. The higher your score, the lower your interest rate will be. Aim for a score of at least 740 to get the BEST rates, but you can qualify for a mortgage with lower scores.

2. The Type of Home Loan: Some loans, like the VA loan, can offer very low interest rates. Other loans, like your traditional 30-year fixed-rate mortgage, will have comparatively higher rates. Many buyers today are opting for adjustable-rate mortgages, (ARMs) which come with lower introductory rates then adjust at set increments (like each year) depending on economic factors.

3. The Term of the Loan: Shorter loan terms will typically come with lower interest rates. If you’re trying for the lowest interest rate possible, look at changing the term of the loan. If you want a fixed rate mortgage, can you swing a 20-year or 15-year instead of a 30-year?

4. Your Down Payment: The more you put down, the lower your interest rate will be because your lender will see you as less of a risky loan. In some cases, I've seen appraisals being waived when enough money  is put down on the initial payment. 

These 4 factors play a large role in your mortgage’s interest rate. That’s why it’s important to save for your down payment and focus on building your credit score before buying a home. You will also want to shop around for lenders because they'll offer different rates as well as look at different kinds of loans. I'm happy to make introductions to some trusted lenders that I've closed deals with and trust explicitly, none of which offer me a referral or compensation. 

Recently, I had the pleasure of sitting down for a podcast with mortgage lender, Angela Czerwinski of WNB Financial in Holmen, WI. She and I went through some Q&A on things like "how to get the best rate" and "What should I do to ensure a successful closing." Got 9 minutes? Take a listen

Your lender is a great resource on interest rates and how they’re calculated, but I’m also happy to answer any questions you may have about qualifying for a great mortgage rate. Just shoot me an email, and I’ll get you the information you need! I'm ready when you are.