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What Factors Impact My Mortgage Interest Rate?

As with anything worthwhile, there are many moving parts to purchasing a home — and one of the first things to set in motion is finding the right mortgage product for your specific situation.

You’ve probably heard plenty of conflicting information regarding various loans and crazy rates, but here I’ll break it down and give you the details about what factors really impact your mortgage interest rate. 

Your credit score

Probably the most important factor in how your lender will calculate your interest rate is your credit score. This little 3-digit number paints a picture of your creditworthiness and reveals the good, the bad, and the ugly when it comes to your payment history and debt load.

If your score is lower than you’d like there are some easy ways to bring it up to speed before you get penalized with a heavier interest rate:

  • Carefully review your credit report for errors
  • Pay all bills early or on time 
  • Use auto-pay so you never forget about bills
  • Bring down credit card balances by paying more than the minimum
  • Don’t apply for loans or credit you don’t need

“Hard” inquiries on your credit report, such as those required for an auto or home loan, have the potential to lower your score and make you seem like more of a risk. Multiple credit inquires indicate to the credit agencies that you’re on the verge of opening one or more new lines of credit. A couple of hard inquiries in the service of obtaining a mortgage may do little to know damage, but shopping around from lender-to-lender could end up costing you money in the long run. Similarly, it’s wise to avoid trying to buy a house and a car, or taking other lines of credit, at the same time because you’ll likely end up paying more for both.

Terms and types

Another big influence on your rate is the kind of loan you’re applying for and how long you agree to make payments. Most mortgages are for a 30-year term, which spreads the loan amount out over 360 monthly payments and keeps your monthly payments lower. However, some buyers prefer to pay off the property faster, so some lenders offer 15- or 20-year structures. 

Most prospective applicants go with a conventional mortgage, but if you’ve got your heart set on scoring a historic home or a fixer-upper to customize, you might want to consider a renovation loan. 

These products wrap the necessary funds for repairs, upgrades, and replacements into the total balance so you only have to make one monthly repayment. They may also have a higher monthly payment, due to repairs, loan principal and interest, and some intermediate-term costs built in. It isn’t uncommon to refinance to a tidier payment once the work is complete. 

The two most popular are Fannie Mae’s HomeStyle Renovation Loan and the Federal Housing Administration’s 203k Loan (check out my previous blog posts to learn more about the benefits and differences between them).

If you or your domestic partner has served in any branch of the US military or National Guard, you may qualify for the Department of Veterans Affairs mortgage loan program

VA loans typically have a competitive interest rate and more lenient requirements for your credit score and down payment (as low as a zero-dollar down payment). Are you or your spouse a veteran, in the reserve, or on active duty? Reach out today to see how I can help you get the most advantageous rate. 

Location, location, location

Different states have different foreclosure laws, and where you’re planning to move can affect your interest rate. An interest rate is merely the cost of the loan to the consumer, or the value of the loan to the lender. As such, riskier loans will cost more. Lenders will add a premium to a mortgage for a condo unit, versus a single family home, for example. 

Your local economy also plays a role. If you’re considering an area with a statistically higher rate of foreclosure than other communities, you’ll have to pay more in interest on your home loan. Currently, Illinois has one of the largest foreclosure rates in the country.

In states like Alaska and Hawai’i, goods and services are more expensive than they are in the continental US, and mortgage rates understandably reflect the cost of doing business in those areas.

Money talks

A crucial element of the calculation is how much you can offer as a down payment. The more you can pony up in advance, the lower your overall loan amount will be, which will result in a lower interest rate.

How much you should put down varies depending on what kind of loan you plan on getting. For first-time home buyers, there are programs to help you source these funds. Here’s a handy list of the programs in every state, as provided by the US Department of Housing and Urban Development. 

Many people who embark on the home buying process receive monetary gifts from well-heeled relatives towards the down payment. If you’re the happy recipient of such a timely offer, congrats! Just be sure to let your mortgage lender know so they can properly assess the eligibility of the funds and properly document their source. 

Size matters 

Your “total” rate is also impacted by the total amount of your requested mortgage. Because some costs (application, underwriting, etc.) related to processing your mortgage are fixed, they represent a larger percentage of a smaller loan. 

The size of the loan may also determine the type of the loan. For example, a “conforming loan” caps out at $647,200 for a single family home (in most markets). Above that threshold, borrowers will be looking for a “jumbo” (or super-jumbo) mortgage which have their own rates. While it may seem intuitive that these rates would be higher, the truth is that it fluctuates, and at the time of this writing jumbo interest rates are actually slightly cheaper than confirming rates. 

External forces

Thus far we’ve covered the factors that you have some level of control over. Unfortunately, there are forces at work that have an effect on your interest rate that you can’t boss around. 

Inflation is a hot topic today as we face unprecedented challenges and supply chain issues as a lingering result of the pandemic. The higher the inflation rate, the more interest rates are likely to rise. 

Supply and demand also play a vital role in the ever-fluctuating interest rate calculations. Lenders bundle mortgages and sell them on the secondary market to generate more cash in order to fund more mortgages – and the cycle continues. The market sets the price through “mortgage-backed securities” (MBS), which fluctuate in cost based on the options investors have. If MBS are generating a lesser return for their investors than other vehicles, the prices 

The bottom line

When you decide to take the plunge into applying for a mortgage and finding your forever home, one of the very first things you should do is talk to an experienced mortgage loan officer and explore your options.

You may be surprised by the competitive rates you’re offered. It all depends on your credit score, where you want to live, and what style of loan best suits your current circumstances. 

It’s critical to do your research and not rush into anything. Buying a house is one of the biggest financial decisions you’ll probably make in your lifetime, and you owe it to yourself to get the very best deal. 

If you have questions, I’m here to help. I’m a 16-year veteran of the Chicagoland real estate industry and I take pride in providing a completely individualized experience for every single one of my clients — give me a call today!


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