What Determines Your Mortgage Rate?

Certified Mortgage Advisor
NMLS 1701021
November 14, 2018

Questions about Mortgage Rate

Today we're gonna talk about mortgage interest rates and what determines the interest rate that you'll end up getting. So I get calls from clients all the time who are asking, Hey, what's your rate? It's a loaded question, really? Because there isn't one set rate that you'll get, or that a lender has to offer.

Financial Market

Your rate is based on two main things. Number one is the financial market. It's based on how the market is performing. So how are mortgage-backed securities performing? How are treasury bonds performing and the overall prospect of the economy? So when you're shopping lenders, keep that in mind that you're gonna want to look at rates on the same day, because day to day, different things can change in the market that will change the overall rates that lenders have access to.

Risk Profile

Number two is the risk profile that you have as a borrower. So there are over 30 different ways that a mortgage rate can be impacted.

Loan-to-value ratio

But the main way, or through things, one is the loan-to-value ratio. So how much money are you putting down?

Credit score

The second one is your credit score. So if you have a lower credit score, you have a higher risk of defaulting or missing a payment on that mortgage. So your rate is gonna be higher to compensate for that risk. Whereas if you have a high credit score, your rate's going to be lower because you have a lower risk of defaulting or missing a payment on that mortgage.

Type of loan product are we using

Then the third thing that will affect your rate greatly is what type of loan product are we using. Are we using a show loan, an FHA, VA, USDA, and Jumbo loan, is it a portfolio loan? All of these things come into end up shifting the way our rate looks.

Par Rate

So the way this happens on the back end. Is that all programs will have kind of what's called a par rate. So if you're, imagine like it's a game of golf, so there's par for what you expect. How many strokes is it's gonna take to meet the par for that course? It's the same thing with mortgage rates is there's a par and it's the baseline of what the rate is gonna be for a program.

Now on top of that is when we add in adjustments for different risk profiles of you as a borrower. So we might have the base rate and then let's say you have a credit score that's above 700. You're gonna get the benefit of being able to have a higher credit score or on the opposite end, let's say you have a lower credit score. You're gonna get hit with a higher rate or a higher rate adjustment because you have a lower credit score. Those are the two big things we have in the market, and then your risk profile will determine the rate.

There isn't one rate

So now that you know that, when you see things on Zillow that are advertising rates, or you see this on other websites advertising here is our 4.375% rate. If you look at the little disclaimer at the bottom, it's gonna show you all of the factors that are coming into that. Most of the time, it's a really big mortgage with a lot of money down with a really high credit score. Everything is really clean and easy.

This is something to keep in mind as you're looking at rates there isn't one rate. What you wanna do is make sure that you talk with a lender and understand everything that's going into, how the rate is being created for you, and all of the risk factors that are being taken into consideration. That way, you know exactly what that rate's looking and you have the opportunity to say, Hey, if we change this one thing about our loan, or if we spent a couple of months working on our credit score, our rate could effectively change for the better.

So hopefully this helps out a little bit, clears up some mystery behind where these rates are coming from. They're based on the market and they're based on your risk profile. But if you have any questions about rates and everything that goes into them, feel free to let me know.

30 Factors that will affect rate

Also, here are the 30 different factors that will affect rate:

  1. Loan Amount (<$180k >$417k)
  2. Loan Type (Conventional, USDA, VA, FHA)
  3. Loan Term (30, 15, 7/1)
  4. Amortization (Fixed and ARM)
  5. Purpose (Purchase, Refinance)
  6. Cash Out/ Amount
  7. LTV
  8. CLTV
  9. Property/ State
  10. Property County
  11. Property Type (SFR, Condo)
  12. # of Units (1-4)
  13. Occupancy (owner/ Investment)
  14. Credit Score
  15. Credit History
  16. Debt Tolerance Ratio
  17. Asset Verification
  18. Reserves
  19. Relocation
  20. Gift Funds
  21. Concessions
  22. Income Verification
  23. Employment Status
  24. Employment Documentation
  25. Co-Borrower (Occ/Un-Occ)
  26. Citizenship
  27. Lock Period (7, 15, 30, 60, 90)
  28. Mortgage Insurance (MO, LPMI)
  29. UW System (AUS, DO, DI, DE)
  30. Escrow (Included, Yes or No)

Some of these are going to affect more than others, and again, the three big ones that are going to affect the rate are the loan to value, your credit score, and the loan program.

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Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.