The Top 5 Factors Affecting Your Mortgage Interest Rate

When you’re ready to buy a home or refinance your current loan, the first thing on your mind is usually the interest rate. Even a fraction of a percentage point can mean the difference between saving and spending tens of thousands of dollars over the life of your loan.

Today, I’m reviewing the factors that affect your mortgage interest rate. While some of these are within your control and others are driven by market conditions, understanding them is the first step toward securing the best possible deal.

Summary

1. Your credit score.
2. Loan to Value Ratio (LTV)
3. Debt-to-Income Ratio (DTI)
4. Loan Type and Loan Term
5. Market Conditions and Economic Factors

1. Your Credit Score

Your credit score is undoubtedly the most significant factor you can control. Lenders use this number to determine how much of a “risk” you are.

• The Rule of Thumb: The higher your score, the lower your interest rate.
• The Cost of Low Credit: A lower credit score often results in a higher interest rate. Over a 30-year mortgage, this could result in paying an extra $100,000 or more in interest.

Pro Tip: If you currently have a lower score, it makes sense to get a mortgage now and refinance later once your credit has improved. Optimizing your credit is a long-game strategy that pays off in huge savings.

2. Loan to Value Ratio (LTV)

The Loan-to-Value ratio is the ratio of your loan amount to the appraised value of the property. For example, if you have a $500,000 loan on a $1 million home, your LTV is 50%.

Lenders prefer lower LTV ratios because they represent less risk. If you are pushing an LTV of 95% (meaning you only put 5% down), your lender will likely charge you a higher interest rate to compensate for that risk. The more equity you have or the larger your down payment, the better your rate will typically be.

3. Debt-to-Income Ratio (DTI)

We calculate your DTI by dividing your monthly debt obligations by your gross monthly income.

• Example: If you earn $10,000 a month but have $5,000 in monthly debt (car loans, credit cards, etc.), your DTI is 50%.

The lower your DTI, the more comfortable a lender feels that you can manage your mortgage payments every month. Lower risk for the lender usually translates to a more competitive interest rate for you.

4. Loan Type and Loan Term

Not all mortgage products are created equal. The specific “math” of your loan will dictate your rate:

• Loan Term: Generally, shorter terms (such as a 10- or 15-year fixed mortgage) offer lower interest rates than a standard 30-year mortgage.
• Loan Type: You can choose between a Fixed-Rate Mortgage (where the rate stays the same) or an Adjustable-Rate Mortgage (ARM). Traditionally, ARMs offer a lower initial interest rate than fixed-rate loans, though this can vary with current market conditions.

5. Market Conditions and Economic Factors

This is the one factor that is entirely out of your control. Interest rates change daily based on broader economic factors, including inflation, unemployment, and the overall health of financial markets.

We saw this clearly between 2020 and 2023. Rates plummeted to record lows of 2.5% during the pandemic and eventually climbed to 8.5% due to market shifts. While you can’t control the market, you can control when you choose to lock in your rate.

Final Thoughts

While you can’t change the national economy, you can definitely improve your credit score, manage your debt, and save for a larger down payment. Keeping these five factors in mind will help you qualify for the best possible mortgage.

If you have questions about how these factors apply to your specific situation, I’d love to help.