Mortgage Interest Rates And 13 Important Things That Will Affect It

A common question among home buyers looking for a mortgage is what the current interest rate is. The challenge is that one single rate that applies to all borrowers does not exist. The reason is that the market is constantly in a state of flux. In addition, there are many factors that impact the interest rate for each borrower.

interest rate

Below Are 13 Things That Can Impact A Borrower’s Interest Rate:

1. Type of Property

Interest rates for single-family homes are typically lower than rates for condos and multi-unit properties with two to four units. 

2. Use of the Property

Properties that will be occupied by the owner have lower rates than investment properties.

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3. Credit Scores

The borrower’s credit score has a major impact on rates. For instance, a borrower who has a credit score of 750 may have an interest rate that is up to 1% lower than a borrower with a score of 670.

4. Amount of Down Payment

Generally, if you can put down a larger down payment, you can lower your interest rate.

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5. Amount of the Loan

Loan amounts that are either very small (e.g. less than $150,000) or very large (e.g. jumbo loans of several million dollars) typically have higher interest rates. On top of that, conforming loans between $548,250 to $822,375 (“High Balance”) will have a higher rate than conforming loans less than $548,250 (“Low Balance”).

6. Type of Loan

Interest rates of FHA and VA loans are generally lower than rates of Fannie Mae and Freddie Mac loans. Also, jumbo rates are usually among the lowest for strong borrowers.

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7. Period of Rate Lock

Borrowers can usually choose when they want to close escrow. Typical escrow periods are 15, 30, 45, or 60 days. Short escrow periods will have lower rates. When lenders provide quotes on interest rates, they usually offer a lock-in period of 15 days, even though escrows usually need longer lock-in periods.

8. Fixed-Rate Loan Periods / Loan Maturity

For fixed rate loans, the longer the fixed rate period, the higher the interest rate. For instance, a 7/1 adjustable rate mortgage starts with a fixed rate for seven years before the rate adjusts. The 7-year rate will typically be lower than a 15-year fixed rate mortgage. In turn, the 15-year mortgage will have a lower rate than a 30-year fixed-rate mortgage.

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9. Combo Loans With 1st and 2nd Mortgages

A loan that combines the first and second mortgages has a higher rate. It depends on what the loan-to-value ratio is.

10. Points and Fees

When lenders quote a rate, they often do not disclose up front any points and fees associated with the loan.

11. No-Cost Refinances

Refinance loans that are “no cost” have higher interest rates than refi loans that integrate fees. The reason for the higher interest rate is to cover the “commission” that is needed for the lender to cover the closing costs that the borrower does not have to pay.

12. Cash Out Refinances

When a borrower wants to refinance for a higher loan amount because he wants to pull out cash against his property, the interest rate will usually be higher, and it depends on the loan to value ratio.

13. Reserves

These are funds remaining after escrow closes. Lenders who offer jumbo loans often want sizable reserves. For instance, the reserve amount can be 12 months of mortgage payments. This has a great impact on the interest rate; sometimes it can lower a rate as much as one-half percent below the rate of a conforming Fannie Mae or Freddie Mac loan.