Top 5 Factors That Influence Mortgage Rates

If you’re planning to buy a home, you’re probably keeping a close eye on mortgage rates. Even a small difference in the rate you lock in can have a big impact on your monthly payment and the total cost of your loan. So, what exactly influences these rates, and how can you improve your chances of getting the best possible deal? Let’s take a closer look at the top five factors that affect mortgage rates and what you can do to make sure you get the best rate for your situation.

1. Your Credit Score

Your credit score is one of the most important factors that affect the interest rate lenders offer you. The higher your score, the lower your mortgage rate will likely be. Lenders see a high credit score as an indicator that you’re a responsible borrower, which reduces their risk.

• How to improve it: Pay down existing debt, make payments on time, and avoid opening new credit accounts before applying for a mortgage. A score of 740 or higher typically qualifies you for the best rates, but many lenders will work with scores in the 600s.

2. Loan Amount and Down Payment

The amount of money you borrow, relative to the home’s value, also plays a role in determining your mortgage rate. If you make a larger down payment, you’re borrowing less and taking on less risk, which could lead to a lower rate.

• How to improve it: If possible, aim to put down at least 20% of the home’s price. Not only could this qualify you for a lower rate, but it also helps you avoid paying private mortgage insurance (PMI).

3. Loan Type and Term

The type of mortgage and the loan term you choose will also influence your rate. For instance, a 30-year fixed-rate mortgage often has a higher rate than a 15-year fixed-rate mortgage because the lender is taking on more risk over a longer period. Adjustable-rate mortgages (ARMs) typically start with lower rates, but they can fluctuate based on market conditions.

• How to improve it: Consider your long-term plans. If you’re planning to stay in your home for a while and can afford higher monthly payments, a shorter loan term might save you money in the long run.

4. Economic Indicators

Mortgage rates are tied to broader economic trends, such as inflation and the Federal Reserve’s policies. When inflation is high, mortgage rates tend to rise as lenders try to maintain their profit margins. Similarly, when the Fed raises interest rates to control inflation, mortgage rates usually follow suit.

• How to stay informed: Keep an eye on economic news and trends. While you can’t control these factors, timing your purchase when rates are lower can save you money over the life of your loan.

5. Debt-to-Income Ratio (DTI)

Lenders want to make sure you’re not taking on more debt than you can handle. That’s why your debt-to-income ratio (DTI) plays a big role in determining your mortgage rate. DTI measures how much of your monthly income goes toward paying debts, including your new mortgage. The lower your DTI, the less risky you appear to lenders, which could result in a lower rate.

• How to improve it: Focus on paying down existing debts before applying for a mortgage to reduce your DTI. Lenders typically prefer a DTI of 43% or less.

How to Secure the Best Mortgage Rate

While some factors that influence mortgage rates are out of your control, like economic trends, there are steps you can take to improve your chances of getting a great rate. By working on your credit score, increasing your down payment, and choosing the right loan type, you can make sure you’re in the best possible position to secure an affordable mortgage.

If you’re ready to take the next step in your home-buying journey or need more personalized advice, don’t hesitate to reach out. I’m here to help you navigate the mortgage process with our preferred lender partner to help you find a loan that fits your needs––or if you have a lender you’d like to work with, our team can help navigate that process with you as well!