8 Factors That Influence Mortgage Rates

When you’re buying a new home, getting the lowest interest rate on a mortgage loan can be a big concern. We often get questions about where mortgage rates are currently and where we think they'll go. It's a difficult question to answer. There is no single rate. The market fluctuates and there are many factors that can affect a borrower's rate. Current market conditions always come into play, but knowing those factors in advance can help you to prepare to get a better rate.

Before we get into some of the factors that can influence your mortgage loan interest rate, it's always helpful to have some historical context for mortgage interest rates. Today's mortgage rates are well below the highest annual average rate of 16.63% in 1981 recorded by Freddie Mac. In 2019, pre-COVID, the average rate for a 30-year fixed mortgage was 3.94%. In 2021, the average rate was 2.96%, the lowest in 30 years. At the beginning of 2022, a 30-year fixed mortgage was 3.22%.

The Federal Reserve's actions to reduce inflation and slow down the housing market have led to sharp rises in mortgage rates since then. Since reaching over 7% in October, rates have decreased slightly. Here are a couple of charts to illustrate the movement of mortgage rates:


So, to get the lowest mortgage rate possible, here are a few things to consider:

1 Credit Score

A person's credit score is one of the most significant factors that impact the mortgage interest rate. Borrowers with a high credit score are considered lower risk by lenders, so their interest rates tend to be lower. You should check your credit score early so that you have time to improve your score if necessary. Over the course of a loan, the difference between a 650 and a 750 credit score could result in thousands of dollars in savings.

2 Down Payment

A higher down payment can also impact a person's mortgage interest rate. A larger down payment reduces the amount the lender must finance, which in turn reduces their risk. As a result, borrowers with a higher down payment are more likely to receive a lower interest rate.

3 Debt-to-Income Ratio

Debt-to-income ratio (DTI) is a financial metric used to measure a person's ability to repay a loan. It's calculated by dividing the total monthly debt payments by the total monthly gross income. A higher DTI ratio can make it more difficult for a person to repay the loan, and as a result, they may be offered a higher interest rate.

4 Loan-to-Value Ratio

The loan-to-value ratio (LTV) is the ratio of the loan amount to the value of the property. A higher LTV can increase the lender's risk, and as a result, mean a higher interest rate. This relates to the down payment.

5 Loan Type

An individual's choice of loan can significantly impact their mortgage interest rate. Fixed-rate mortgages, for example, have a fixed interest rate throughout the life of the loan, while adjustable-rate mortgages (ARM) can change over time. Rates for government-backed mortgages, such as FHA, VA, and USDA, are usually lower than conventional rates, but they can also include additional fees and mortgage insurance. Rates can also vary depending on the term of the loan, with shorter-term loans (15 years, for example) offering lower rates, and a 7/1 ARM generally has a lower rate than a 15-year mortgage...

6 Points and Fees

These are the additional charges that a borrower must pay in order to obtain a mortgage loan. These charges can include origination fees, processing fees, administration fees, and points. Borrowers should carefully consider the costs of these fees and points when evaluating the overall cost of their mortgage loan.

7 Discount Points

These are a form of prepaid interest that a borrower can choose to pay in order to lower the overall interest rate on their mortgage loan. A point will typically lower your interest rate by about 0.25% in exchange for upfront cash, and costs 1% of the home loan amount. For example, if you have a $100,000 loan, the discount point would cost you $1000 upfront and be recouped with the interest savings over the life of the loan. Discount points can reduce your monthly mortgage payment and are a viable option for borrowers who plan to stay in their homes for an extended period of time. If you plan to sell or refinance in a couple of years it probably doesn't make sense to buy points.

8 Property Type

Condo mortgages tend to have slightly higher interest rates compared to a loan for a single-family home because lenders need to compensate for the additional risk of financing property in an association. Investment properties or vacation homes may be seen as higher risk and result in a higher mortgage rate, as they are not a borrower's primary residence.


Remember that average mortgage rates are only a general guideline. There are many factors that can impact a person's mortgage rate. By understanding these factors, borrowers can be proactive when preparing and making decisions about their mortgages. Speak to a qualified mortgage advisor, shop around, and choose the right option for your financial situation.


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