Interest Rates: How Are They Determined?

Did you know that mortgage interest rates vary from person to person? Interest rates are based on specific criteria, which can vary between financial institutions. Lenders use several factors to determine the interest rate for each borrower. These factors include loan terms, such as the loan-to-value, length of the loan, and program type. Lenders also consider information about the applicant, including credit score, occupancy type, and debt-to-income ratio. Then, there are features of the lock term and fees associated with the rate. Below are details on the various criteria that are often used to determine the interest rate.

Loan Features that Affect Your Rate

  • Loan Type (Agency or Non-Agency Conventional, FHA, VA, or USDA)
  • Loan Purpose (Purchase, Refinance, Cash-Out Refinance, Construction)
  • Loan Term (Number of years you have to repay the loan)
  • Occupancy Type (Primary residence, Second Home, or Investment Property)
  • Amortization Type (Fixed or variable rate)
  • Mortgage Insurance (Lender Paid, Buyer Paid Monthly, Upfront, or Both)

Qualifying Factors that Impact Your Rate

  • Debt-to-Income Ratio (Total monthly obligations divided by your income)
  • Loan-to-Value (Loan amount divided by the sales price or the appraised value of the property)
  • Combined Loan-to-Value (If you have more than one loan on the property, the total amount of all loans divided by the sales price or appraised value)
  • Property Type and Units (Single Family, Multi-Unit, Condo, Townhome)

Lock Features that Affect Your Rate

  • Length of Lock Term (Number of Days from Lock to Expiration)
  • Lender fees (Discount Points and Origination Charges)
  • Lender Credits
  • Taxes and Insurance Escrowed (Waived vs. Included in Monthly Payment)

Any changes to the criteria listed above could cause an additional adjustment to pricing, which could result in a different rate. Of course, other factors may also be considered based on the specific transaction. Understanding all that goes into a mortgage interest rate is important to ensure you are fully prepared when it’s time to lock in your rate.


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