Interest rates on mortgages reflect the level of risk for lenders. The higher the perceived risk of repayment, the higher the interest rate charged to offset that risk.

Factors Affecting Your Rate

Several factors influence the interest rate you’ll receive:

1. Credit Score

Your credit score is paramount. Most lenders use FICO scores, ranging from 300-850, to gauge creditworthiness. A score of 720 or higher historically gets you better rates, but even higher scores can improve your terms. Target 780 or better for best results. If your score is low, you may not qualify for a mortgage or may need a larger down payment.

2. Loan-to-Value Ratio and Down Payment

The loan-to-value (LTV) ratio compares the loan amount to the home’s value. A higher down payment lowers the LTV ratio, reducing risk for lenders. Borrowers with lower LTV ratios are often considered less risky and may get better rates. Additionally, a down payment of 20% or more typically avoids private mortgage insurance.

3. Loan Purpose, Type, and Term

The purpose of your loan (e.g., purchase, refinance) and its type (e.g., fixed-rate, adjustable-rate) affect your interest rate. Purchase loans may have lower rates than cash-out refinances, and fixed-rate loans generally have higher rates than adjustable-rate loans. Loan terms also impact rates, with shorter terms often having lower rates.

4. Loan Amount

Loan size can affect rates. Smaller loans may have slightly higher rates to cover fixed costs, while larger loans may have slightly lower rates.

5. Location

The location of the property can influence rates due to local default rates, risk factors, and foreclosure laws.

Ways to Lower Your Rate

If you want to secure a lower interest rate, consider these strategies:

1. Improve Your Credit Score

Know your FICO score and take steps to raise it if necessary. Correct any errors on your credit report promptly. Seek out a mortgage professional’s help and advice.

2. Increase Your Down Payment

A larger down payment signals lower risk to lenders, potentially leading to a lower interest rate. First Time Homebuyer specific loans can have lower rates and discounted mortgage insurance rates.

3. Pay Points on the Loan

Paying mortgage points upfront can reduce your interest rate. Each point typically costs 1% of the loan amount and can result in significant savings over time, especially if you plan to stay in the home long-term. Another way to help bring your rates down is to seek out a Temporary Buydown. You can buy down your rate for 1 to 3 years, with an idea of looking to refinance down the road when rates come down. In some cases a good way to get a Temporary Buydown to work for you is to ask the seller to pay for it. Instead of increasing or lowering a price, use a seller concession in a creative way. Seek out a mortgage professional’s help to get this done.

Contact Mike Stoy at Epic Mortgage

For expert help navigating mortgage rates and terms, contact Mike Stoy at Epic Mortgage. He can provide personalized assistance to help you secure the best possible rate for your situation. Reach out at 262-424-9820 or email mike@yourepicender.com.

Understanding how lenders determine your interest rate and taking steps to improve your financial profile can save you thousands of dollars over the life of your loan.