How Are Mortgage Rates Determined?

For the average homebuyer, you may not have much knowledge when it comes to mortgages and the loan process. Mortgage rates — how they work and where they come from—may be confusing at times. Luckily, we can make your lives a little bit easier.

To understand how mortgage rates are determined, we must first understand what a mortgage rate is. We know that a mortgage is a loan on a house, there for the mortgage rates are simply the interest rate on that loan. These rates are determined by the lender. They can either fluctuate, or these rates may be fixed, where they stay the same for the period of the mortgage. Depending on interest rate cycles, mortgage rates may rise or fall. The price of a mortgage rate may differ depending on an individual’s credit score as well. Usually, an individual with a high credit score will have a lower mortgage rate than someone who has a low credit score. The reason for this is because lenders use your credit score as a judgement of how reliable you will be in paying your loan.

Some other key factors that go into mortgage rates include the location of the home, and of course, the price. Also, your credit score, down payment and occupancy intention factor in to what the rates will be. To add to that, the loan amount may also play a role in affecting mortgage rates.

Another factor that plays a role in mortgage rates is the down payment that is put on a home. If the down payment is a significantly large amount, the rate will be lower because it is seen as less of a risk in the lender’s eyes. They believe that since it is a bigger investment, and you have more stake in the home, it is safer than someone who does not.

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Comments

  1. My husband and I have been renting since we married and now that we are looking for a house, we’ve realized we don’t know the first thing about mortgages. I wanted to thank you for your explanation about how mortgage rates fluctuate due to interest rate cycles or our own credit scores. Maybe it would be best to speak with a mortgage company and see if we would do better with a fixed-rate mortgage or a different option.

    1. Sarah,
      Please feel free to reach out to us directly. I can be reached at melinda@ttal.info or 888-76-TRUTH. We would be happy to help you and your family.

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