Your mortgage rate directly affects how high or low your monthly loan payments are. Even a fraction of a percent can result in a savings of thousands of dollars over the life of your mortgage. Here’s how mortgage rates work and how to get the lowest rate possible.
How mortgage rates work
A mortgage rate is a percentage of your loan balance that lenders charge each year for borrowing money.
It’s the cost of borrowing money that you pay along with your principal payment. For example, if you have a 4% mortgage rate, you’ll pay 4% of your loan balance in interest each year, which is split up into 12 months and added to your monthly payment. As you pay off your loan principal, the amount of interest you pay also goes down each month. But due to a formula called amortization, your monthly payments remain the same over the life of your loan.
How often do mortgage rates change?
Mortgage rates change daily. These rate changes don’t affect fixed-rate mortgages, but they can affect adjustable-rate mortgages, which reset rates based on a schedule in your loan contract.
When applying for a loan, consider locking in your rate if the lender allows it. That way, you’re protected against higher rates should it fluctuate before closing.
What interest rate can I expect on a mortgage?
Though most lenders advertise a range of interest rates you can expect on mortgages, those with strong credit scores typically get the lowest rates.
Lenders consider many factors when assessing your overall financial health, with most focused on:
- Credit score. In general, the higher your credit score, the lower the interest rate you’re approved for.
- Down payment. Most lenders prefer borrowers who can afford a down payment of at least 20% of the property’s purchase price.
- Loan term. Shorter loan terms tend to come with lower interest rates, but they leave you with less time — and often less flexibility — to fully pay off your loan.
- Loan type. Loan programs through the FHA or the VA often come with different interest rates than conventional loans.
Interest rate vs. APR
When you’re looking to take out a mortgage or considering refinancing, you’ll find lenders advertising both APR and interest rates. While they both involve a rate at which you accrue interest, they are two different types of rates.
The interest rate is the fee you pay to a lender expressed as a percentage of the amount you’re borrowing. The APR — or annual percentage rate — is your interest rate along with fees like mortgage insurance, any discount points, loan origination fees and some closing costs. It’s why the APR is often higher than the interest rate.
When you’re shopping for a mortgage, comparing APRs among lenders can give you a better sense of the total cost of the mortgage. But if you’re shopping for an adjustable-rate mortgage (ARM), your APR may change when your interest rate changes.
How can I lower my interest rate?
If you build in the time to shore up your financial health, you’ll be in a better position to land the lender’s lowest interest rate:
- Increase your credit score. Boost your score by paying your bills on time, paying off debt, keeping low balances on your credit cards and don’t open or close any credit accounts right before you apply for a mortgage.
- Maintain stable employment and income. Lenders prefer to see a long, consistent work history for at least two years with stable, predictable income.
- Lower your LTV. Expressed as a percentage, your loan-to-value ratio compares your total loan amount to the property’s value. A low LTV signals less risk to potential lenders. You can lower your LTV by borrowing less or increasing your down payment.
- Discount points. Many lenders allow you to buy down your interest rate for an upfront fee due at closing. Typically, one point costs 1% of your mortgage amount.
How to compare mortgage rates
Here are a few strategies to help you effectively compare mortgage rates.
- Find the right loan program. Loan products come with their own mortgage rate, loan terms and borrower eligibility requirements. Narrow down the type of loan you’re interested in.
- Compare lenders. You can get a mortgage from several different types of lenders, such as banks, credit unions and even digital, online-only lenders. Since each lender offers different terms and mortgage rates, compare lenders to learn your options.
- Hire a mortgage broker. A broker doesn’t finance loans. Instead, they help you compare lenders, quotes and offers to find a lender for you.
- Compare APRs. A lower interest rate doesn’t guarantee that you’ll save money. Look at each loan’s annual percentage rate (APR), which reflects your mortgage rate and other charges specific to your loan, such as application and underwriting fees.
Compare mortgage lenders and brokersCompare top brands by home loan type, state availability and credit score. Select See rates to provide the lender with basic property and financial details for personalized rates.
Your mortgage rate is an important factor when choosing a lender and a home loan. When shopping for a mortgage, compare advertised APRs versus interest rates. APR takes into account your mortgage rate, discounts and other charges that come with borrowing. If you aren’t in a hurry, take steps to improve your overall financial health so that you’re better positioned for a low APR.
Common questions about mortgage rates
More guides on Finder
Consumer lending in 2021 and beyond
The lasting effects of the coronavirus pandemic on the lending industry and what it means for customers.
How to start a solo 401(k)
A retirement plan for self-employed individuals but may come with high administrative fees.
Does a car loan affect your mortgage application?
Find out how to increase your borrowing power and get approved for a mortgage even if you have a car loan.
Prime Alliance Bank Personal Money Market account review
Prime Alliance Bank offers competitive interest rates on its money market accounts, but you won’t get any paper checks or debit cards.
What is Yearn Finance?
Learn how to use DeFi aggregator Yearn Finance to earn interest on your cryptocurrency.
Alternatives to Fundrise
Check out these Fundrise competitors.
What happens to my home loan if I die?
Learn about what will happen to your home loan when you die and how to avoid any nasty situations with some pre-planning.
Mortgage brokers versus banks
Check out our guide on the differences between mortgage brokers and bank loan officers. See which one will suit your needs.
What influences a property’s value?
From supply and demand through to location, facilities and planned infrastructure projects, there are plenty of factors that can influence property value.
Getting a home loan on maternity leave
Some lenders will approve a home loan even though you’re not receiving a permanent income. However, you’ll need to undergo some assessments.
Ask an Expert