How Do I Get the Best Mortgage Rate? Understanding the 13 Variables That Dictate Mortgage Interest Rate Pricing

When it comes to securing a mortgage, many homebuyers focus solely on the advertised interest rates they see online or hear about from friends. However, mortgage rates are not one-size-fits-all. In reality, they are influenced by a variety of factors specific to each borrower and property. Here are 13 key variables that impact mortgage interest rate pricing:

1. Purchase Price

The total cost of the home plays a role in rate pricing as it also can dictate the loan program (more below). Higher-priced homes may qualify for better rates due to a higher potential for that loan servicer to make more money on the interest.

2. Down Payment

A larger down payment generally results in better interest rates because it reduces the lender’s risk. A lower down payment may lead to higher rates or the need for mortgage insurance (under 20% down).

3. FICO Score

Credit scores are one of the most significant factors in mortgage pricing. Higher scores typically receive lower rates, while lower scores may result in higher costs or additional fees. The minimum FICO score to lend is 580 and the best interest rate pricing is over 780 FICO.

4. Occupancy Type

The intended use of the property affects interest rates. Primary residences get the best rates, while second homes and investment properties usually come with higher rates due to increased risk.

5. Loan Term

The length of your loan matters. A 30-year fixed mortgage generally has a higher rate than a 15-year fixed loan. Adjustable-rate mortgages (ARMs) can start lower but may increase over time.

6. Property Type

Different property types carry different pricing adjustments. Single-family homes usually have the lowest rates, while condos, manufactured homes, and multi-unit properties may have higher costs.

7. Number of Units on the Property

A single-family home will typically have better pricing than a duplex, triplex, or fourplex. Multi-unit properties present higher risk and thus carry slightly higher rates.

8. Loan Product

Conventional, FHA, VA, and USDA loans all have different pricing structures. Government-backed loans (FHA, VA, USDA) can sometimes offer lower rates, depending on borrower qualifications.

9. Loan Purpose

The reason for the loan affects pricing. Purchases generally have better rates than refinances. A cash-out refinance, which allows borrowers to pull equity from their home, tends to have the highest rates among these options.

10. Waiving Escrows vs. Impounding

If you choose to waive escrow accounts (i.e., handling property taxes and insurance yourself), you might see a slight increase in your rate. Once again, due to risk. Keeping an escrow account can help maintain lower pricing.

11. First-Time Home Buyer Status

Some loan programs and lenders offer rate discounts or special financing options for first-time homebuyers, helping them access lower interest rates.

12. Yearly Income

Certain loan programs provide rate advantages to borrowers with income below specific thresholds. Programs like HomeReady and Home Possible offer lower rates and reduced mortgage insurance costs for qualifying first-time buyers.

13. Day You Lock Your Rate

Mortgage rates fluctuate daily and can even change multiple times a day based on market conditions. Timing can play a crucial role in securing the best possible rate.

Final Thoughts

Understanding these 13 variables can help you better navigate the mortgage process and optimize your interest rate. If you're considering buying or refinancing a home, work with a trusted mortgage professional who can guide you through these factors and help secure the best rate possible.

If you have questions or need personalized mortgage advice, feel free to reach out!