5 Factors That Affect Mortgage Rates

When buying a home, the mortgage interest rate you secure can have a huge impact on both your monthly payments and the total cost of your loan over time. Even a 0.5% difference in your rate can translate into thousands of dollars in savings or extra costs over the life of a 30-year mortgage.

Mortgage rates are not set in stone; they are influenced by several factors, including unique borrower factors and the broader lending environment. Your credit score, the size of your down payment, the type of property you’re buying, whether it will be your primary residence or an investment, and even how your loan officer is paid all play a role in determining the rate you’ll receive.

Understanding these factors before you apply for a mortgage can help you make smarter choices, negotiate better terms, and potentially save thousands of dollars over the life of your loan.

In this guide, we break down the top five factors that directly influence mortgage rates and explain how each can affect your borrowing costs.

1. Credit Score

Your credit score is one of the most important factors in determining your mortgage rate. Lenders use it to assess your reliability as a borrower. Higher scores demonstrate financial responsibility and often result in lower rates, while lower scores signal higher risk, which can increase your interest rate.

A borrower with an excellent credit score might qualify for a 30-year fixed mortgage at 6.2%, whereas someone with fair credit could face 7%+, adding hundreds of dollars per month on a $300,000 loan.

Check out how to lower your 30-year fixed mortgage rate

2. Down Payment

The size of your down payment can significantly influence your mortgage rate. Key considerations include:

• 3% Down Payment: Typically results in a higher interest rate and requires private mortgage insurance (PMI).
  
• 5% Down Payment: Considerably lowers your risk and can reduce your rate compared to 3%, but the larger impact is in PMI reduction of almost 40%.
  
• 20% Down Payment: Will eliminate PMI but doens’t have a huge impact on the interest rate.

On a $400,000 home, a 3% down payment might result in a rate of 6.7%, a 5% down payment could lower it to 6.5%, and a 20% down payment might secure 6.2%.

Also, know how much equity you need to remove PMI?

3. Property Type

The type of property you are purchasing affects your mortgage rate. Single-family homes (SFR) are generally viewed as lower risk, often resulting in slightly lower rates. Condos may have higher rates due to homeowner association rules, shared amenities, and increased lender risk.

A 30-year fixed mortgage for a single-family home might be 6.3%, while a similar loan for a condo could be 6.6%.

4. Occupancy Type (Primary vs Investment)

How you intend to use the property also impacts your mortgage rate. Loans for primary residences have lower rates because lenders view them as lower risk, and borrowers are more likely to prioritize payments on the home they live in.

Investment properties, however, often carry rates 0.25–0.50% higher due to increased default risk and stricter qualification requirements.

Loan structure also plays a role. For example, DSCR (Debt Service Coverage Ratio) loans, which are based on a property’s rental income relative to its mortgage payment, are considered non-conforming loans and generally come with higher interest rates due to their risk profile.

By comparison, conventional investor loans offer lower rates than DSCR loans but remain higher than primary residence financing because lenders still factor in the elevated risk associated with rental properties.

5. How Your Loan Officer Gets Paid

The method used to compensate your loan officer can affect your mortgage rate:

• Lender-Paid: The lender covers the fee, which usually results in a rate 0.5-1.5% higher, but no upfront fee appears in Section A of the Loan Estimate.
  
• Borrower-Paid: You pay the fee directly, allowing for a rate usually 1% lower, but the cost will appear in Section A of the Loan Estimate.
  

On a $400,000 loan, a lender-paid compensation might increase your rate, whereas borrower-paid may increase your cash to close, so it’s a good idea to also compare the APR. At Altgage, we prefer offering borrower-paid fees on conventional loans that are transparently listed in section A and can help lower the lifetime cost of the loan by $50,000 or more.

FAQs

1. Can shopping around with multiple lenders help me get a better rate?

‍Yes. Rates can vary between lenders, so comparing offers may save you thousands over the life of your loan. Get the best mortgage prices with Altgage.

2. How often do mortgage rates change?

‍Mortgage rates can change daily based on economic trends, bond yields, and lender demand. Monitoring rates closely can help you time your lock.

3. What is a rate lock, and should I use one?

‍A rate lock guarantees your mortgage rate for a set period, protecting you if rates rise before closing. It’s useful in a volatile market.

4. How does my loan term affect the mortgage rate?

‍Shorter-term loans (e.g., 15 years) usually have lower rates than 30-year loans because the lender’s risk is reduced.

5. Can a refinance help me get a lower mortgage rate?

‍Yes. Refinancing can help you lower your interest rate if market conditions improve or your credit profile strengthens.

6. How do jumbo loans affect mortgage rates?

‍Jumbo loans, which exceed conforming loan limits, often carry higher rates due to increased lender risk.

7. Can paying off other debts improve my mortgage rate?

‍Reducing your debt-to-income ratio by paying off loans or credit cards can improve your rate by showing lenders that you can handle additional debt responsibly.