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Mortgage Interest Rates: Why You Get Offered the Worst Ones

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When the time comes to buy a home, you should hope for a buyer's market, ample assets in the bank for a down payment, a great home to buy, and an environment of low mortgage interest rates. Low prevailing rates don't necessarily mean that you'll get offered low ones, though. Here are some reasons why you might get offered disappointing mortgage interest rates.

The lender
Shop around, and you'll find yourself offered a variety of mortgage interest rates, as different lenders use different (or differently weighted) criteria and algorithms when making their calculations and decisions. When you shop around, try a range of lenders, such as one or more national banks, regional banks, credit unions, and community banks. Credit unions, for example, often offer lower rates than big national banks.

The lock-in period
It's common to lock in a mortgage rate with a lender, but the longer the lock-in period you choose, the higher the mortgage rate you may be offered, as this exposes the bank to more risk. Alternatively, you may have to pay in points -- i.e., prepaid interest -- for a longer lock-in.

The type of mortgage
Mortgage interest rates differ by the kind of mortgage you buy. A 30-year fixed-rate mortgage will have a higher rate than a 15-year mortgage. A fixed-rate mortgage will often have a higher rate than an adjustable-rate mortgage (ARM). (ARMs usually charge a low rate for the first few years before adjusting the rate upward or downward.) Meanwhile, a "jumbo" loan, which is one that exceeds the limit for a "conforming" loan (recently $417,000 in most spots in America), can also carry mortgage higher interest rates. Then there are FHA loans, which are insured by the Federal Housing Authority. They remove much risk from the lender, so lenders will often charge lower mortgage interest rates for them and may have easier qualification standards as well. Refinancing deals also sometimes carry higher rates.

Your down payment
How much home buyers put down affects the mortgage interest rates they get. Lenders will typically offer better rates to those who have a loan-to-value ratio of 75 or less, meaning that they made a down payment of 25% or more of the home's value.

Points
If you're getting offered higher mortgage interest rates than you want, you can probably lower them by offering to pay one or more "points." A point is 1% of the value of the loan, so with a $150,000 loan, you'd pay $1,500 per point, and your lender would offer a lower rate. Only do so if you're planning to stay in the home a while, as the lower monthly payment might not make up for the upfront cost. (By the way, be sure to factor fees into your comparisons of mortgage interest rates. One lender might offer a slightly higher rate but could charge you far less in closing costs and fees.)

The property type
Mortgage interest rates also vary according to property type. If you're buying a condominium, for example, you'll often be offered higher mortgage interest rates than if you were buying a single-family home. (In recent years, defaults were higher for condos than for single-family homes, leading lenders to be more cautious about them today.) Multifamily buildings or investment properties also typically face higher rates.

Your debt, income, and credit score
Mortgage interest rates are also influenced by you -- your debt level, income, and credit score. The credit score has a lot to do with it. Lenders look at your debt-to-income ratio, and the lower the better. They take into account your financial obligations, such as car loans, student loans, credit card debt, alimony, and child support. And they assess the strength and reliability of your income, too. Someone with a sizable salary who's been at the same job for many years will likely get offered better mortgage interest rates than someone earning less through a freelancing job. Factors that affect your credit score include unpaid bills, late bills, and using much of your available credit limit. You can increase your credit score by fixing errors on it, paying down debt, and increasing your credit limit, among other strategies.

The general riskiness of the loan
If you choose not to establish an escrow account to pay for the home's taxes and insurance and opt to pay for those yourself, the mortgage interest rates you're offered could be a little higher, as there's a somewhat higher risk of problems.

So when you shop around for a mortgage and find that you're being offered poor mortgage interest rates, it might be because you're paying only 15% down on the home, you have a low credit score, and you're buying a rental property -- or one or more of a range of factors. Fortunately, many factors are within your control, at least to some extent, so you may be able to take some steps to lower your rate.

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Selena Maranjian
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Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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