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Mortgage Rate Facts

What is a mortgage interest rate?

In the simplest terms, a mortgage interest rate is a percentage of a home loan amount (the principal) charged by a lender for borrowing its money.

What are the different interest rates types?

Mortgage rates are either fixed or adjustable. A fixed-rate loan’s interest will not change during the life of the loan. The interest rate on an adjustable-rate mortgage will be fixed initially, but after the initial term it may change based upon market conditions.

What is an annual percentage rate?

APR (annual percentage rate) is not the same as the interest rate. It is the total annual cost of a home loan to the borrower. It includes the interest rate, origination fees, loan discounts, transaction charges and other premiums. This results in a higher loan amount. The APR is typically higher than the mortgage rate, so you should always ask for the APR to understand a loan’s true cost.

How are mortgage rates set?

Home loan rates are determined by market conditions including inflation, economic growth (and by extension projected demand for housing), the Federal Reserve, and more.

What factors affect your interest rate?

Your individual interest rate takes into account facts specific to you and your desired loan. This includes

  • Credit score - This indicates the risk you present as a borrower. A higher credit score will get you a lower interest rate because it demonstrates that you are low-risk and likely to repay your loan
  • Down payment - A higher down payment will result in a smaller overall loan amount, another factor which reduces the risk to the lender
  • Loan term - Term reverse to the length of time you have to repay the loan. Common fixed-rate terms are 30 years and 15 years. Shorter terms have lower interest rates.

How can you lower your mortgage interest rate?

There are several ways to secure a lower interest rate:

  • Improve your credit score -- Pay your bills in a timely manner, pay down large balances, and don’t open any new credit accounts during the loan process
  • Make a larger down payment
  • Improve your debt-to-income ratio -- Pay down your outstanding debts, including student loans, car loans, and credit card balances. You can also achieve this by increasing your income.
  • Explore different loan options -- Work closely with a loan originator to find out what your options are and which one will give you the best interest rate