The Lowdown on Loans – What Determines Your Mortgage Rate?

Understanding mortgage loans and interest rates can be confusing and frustrating for many homebuyers. It doesn’t help that most advertised rates are just a marketing ploy to lure you in as I talked about a few weeks ago in Part 5 of my Mortgage Loan 9-Part series, Why the Interest Rate You See Online is NOT the One You’ll Get.

In fact, a lender looks at several factors to determine an interest rate based on YOUR specific financial situation, including your credit score, your down payment amount, your loan amount, and even the type of home you purchase.

The bottom line is — Every loan scenario is unique, which means you might get a different interest rate than the person next to you (and the one you saw advertised).

No One-Size-Fits-All Interest Rate

Here are 4 important points to be aware of before you go shopping for a loan:

• Rates vary depending on the market and several borrower-specific factors. That’s what makes it complicated.

• There are tons of different banks, credit unions and lenders that offer entirely different type of loans and corresponding interest rates.

• The rates you see advertised are usually meant for someone with excellent credit, applying for an owner-occupied single-family home loan, with a large down payment.

• Your scenario is unique, so it’s good to know about all the factors lenders are interested in when you apply for a loan.

Loan Amount

Your rate will be different depending on the size of your mortgage. You will likely get a lower interest rate when your loan amount is under $498,257 and an even higher rate if your loan amount is over $766,550 (based on 2024 values, subject to change annually).

When you hear things like jumbo loans, conforming loans, and government-backed loans such as FHA loan limits, these are the loan amounts for Amador County, CA they are talking about, and these different amounts affect your interest rate (and down payment requirements).

Credit Score

This one is pretty simple: the higher your credit score, the lower your rate.

This is the single most important factor to determining your mortgage rate. But your score isn’t the only thing that matters; what it says on your credit report matters too!

Loan-to-Value Ratio

The loan-to-value ratio is the loan amount as a percentage of the total appraised value of the property. The higher the loan-to-value percentage, the higher your mortgage rate will be.

Your LTV is calculated by taking the current loan balance divided by your home’s appraised value, then multiplied by 100 to convert it into a %.  Let’s say you purchase a property that is appraised at $500,000 and you put down $100,000 so your mortgage loan amount was $400,000.

Taking the example above: $400,000 ÷ $500,000 = 0.8 x 100 = 80% LTV. So in essence, the higher down payment you have, the lower your LTV, and the lower your rate. 

Also, keep in mind that as you pay down your mortgage, your home’s value will likely be increasing as well. Your LTV takes into account your home’s current value. So, you can substantially improve your LTV in a year or two, depending on the current market.

If you have to pay PMI, this can help you remove your PMI payment sooner than you might think, but we’ll get into that in another article down the road. If you have further questions about PMI now, let me know and we can talk about it more in-depth.   

Property Type

If you’re purchasing a single-family residence, the mortgage fees will be slightly lower than if you were to purchase a condo. This is because a condo is part of a larger complex, so if other owners in the complex miss a payment or there are vacant condos, your condo will lose value. Interest rates will be even higher for a co-op.

Occupancy Type

There are three types of occupancy: owner-occupied, second home, or investment property.

A second home will have slightly higher mortgage rates and an investment property may be even higher. This is simply because there’s less of a chance that a homeowner will walk away and miss payments on their primary residence.

Debt-to-Income Ratio

Also commonly referred to as “DTI”, this is how a bank determines how much home you can afford.

It is your monthly liabilities (credit cards, and other loans) divided by your monthly income. Your DTI does not include other monthly expenses like utilities, gas, or groceries.

This gives them a percentage, and the lower the percentage, the lower your mortgage rate.

There are also DTI limits for each type of mortgage product. The higher your DTI, the more limited your loan options may become.  

First Steps to Take

This is all about risk. Lenders base the interest rate they give you on how much risk they’re undertaking by loaning to you. That’s why I will always give you as much information as possible about the process and how to prepare your finances.

I recommend you shop around for your mortgage rate! Again, different lenders will offer different loans and rates, so the more you know, the better your rate will be. I have great lenders I can connect you with that have low rates.

All of this can feel overwhelming and complicated, but don’t worry – you’re not alone!

No matter what your loan scenario is, I know all about mortgage rates and the lending process. I’m here to answer all your questions and lead you step-by-step to your best deal.