Mortgage Interest Rates: Why You Get Offered the Worst Ones

You can influence the mortgage interest rates you're offered.

Jul 28, 2014 at 6:30PM
Mark Moz

Credit: pallspera.com via Flickr.

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.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers