Interest Rates - Characteristics that affect your rate

If you are like most people, you want to get the lowest interest rate that you can find for your mortgage loan. But how is your interest rate determined? That can be difficult to figure out for even the savviest of mortgage shoppers.
Knowing what factors determine your mortgage interest rate can help you better prepare for the homebuying process and for negotiating your mortgage loan. Even saving a fraction of a percent on your interest rate can save you thousands of dollars over the life of your mortgage loan.

How does my credit score affect my ability to get a mortgage loan?
Answer:
Your credit score, as well as the information on your credit report, are key ingredients in determining whether you’ll be able to get a mortgage, and the rate you’ll pay.
Your credit report and your credit score are two different things. Your credit score is calculated based on the information in your credit report. Higher scores reflect a better credit history and make you eligible for lower interest rates. You have many different credit scores, and there are many ways to get a credit score. However, most mortgage lenders use FICO scores. Your score can differ depending on which credit reporting agency is used. Most mortgage lenders look at scores from all three major credit reporting agencies – Equifax, Experian, and TransUnion – and use the middle score for deciding what rate to offer you.
Errors on your credit report can reduce your score artificially – which could mean a higher interest rate and less money in your pocket – so it is important to check your credit report and correct any errors well before you apply for a loan.
Your credit score is only one component of your mortgage lender’s decision, but it’s an important one. Other factors include:
- Credit report
- Credit history with that lender
- The amount of debt you already have
- How much you have in savings
- Your total assets
- Current income
Tip: Don’t apply for a lot of new credit in a brief time, especially if you are getting ready to get a mortgage. Doing so may negatively affect your score. Your credit score may decline if you have too many credit accounts. It can also go down if you apply for or open many new accounts in a brief time. However, when you request your own credit report, or when your existing creditors check your credit report, those requests to see your credit report should not hurt your score.
Here are seven key factors that affect your interest rate that you should know
One more thing to consider - The trade-off between points and interest rates
As you shop for a mortgage, you’ll see that lenders also offer different interest rates on loans with different “points.”
Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs.
Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be an appropriate choice for someone who knows they will keep the loan for a long time.
Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate. Keep in mind that some lenders may also offer lender credits that are unconnected to the interest rate you pay – for example, a temporary offer, or to compensate for a problem.
There are three main choices you can make about points and lender credits:
You can decide you don’t want to pay or receive points at all.
You can pay points in exchange for a lower interest rate.
You can choose to have lender credits and use them to cover some of your closing costs but pay a higher rate.
Now you know - It’s not just one of these factors in particular – it’s the combination – that together determine your interest rate. Everyone’s situation is different, so by understanding these factors, you will be well on your way to shopping for the right mortgage loan – and interest rate – that is appropriate for your situation.
Source: Consumer Financial Protection Bureau (CFPB)