Home Mortgage Rates – 6 Key Factors

August 17, 2010

Home mortgage rates offered by your bank can vary from person to person; what determines the interest rate you’re eligible for? 

While the interest rates on 10 year Treasury notes have a major impact on whether mortgage rates rise or fall, there are many individual factors that go into determining your interest rate. Those individual factors are measurements banks can use to help calculate the amount of risk they take on if they give you a home loan.  Let’s take a look at six of the main factors that typically figure into your home mortgage rate.

1) Loan Amount: The bigger your loan amount, the larger the risk of default. A larger mortgage usually means bigger payments, and that means a bigger stress on your budget. If you are getting a jumbo mortgage, the increased risk can be reflected in a higher interest rate.

2) Amortization Schedule: When you borrow money, a schedule is created for repayment that’s known as an amortization schedule. It reflects how much of each payment goes toward interest and how much goes toward principal each month, in addition to determining when the loan will be paid off.

If you have a longer loan term, it means that you build equity (or ownership) in your home at a slower rate. A long mortgage term also means that you have more time to default. If you are willing to pay off your mortgage faster, you will likely see a lower interest rate.

3) Credit Score: You probably knew this was coming. Whether or not you think the credit scoring system is fair, the fact is that mortgage lenders use this system to evaluate your level of fiscal responsibility.

Your credit score is a reflection on your past behaviors related to borrowing money. A lower score means that there is a greater risk that you will default on the mortgage, or be late in paying. In order to make up for that, you will have to pay a higher mortgage rate. A good credit score can save you thousands of dollars (even tens of thousands of dollars) in interest charges.  You can read more on how your credit score affects interest rates.

4) Loan-to-Value Ratio: This number represents the amount of money you owe on your mortgage as compared to the value of the home. If you have a home that is worth $200,000 and owe $170,000, your loan-to-value ratio is 85%.

Many lenders consider a loan-to-value ratio of 80% or less to represent an more favorable situation, since it represents an amount of equity in the home that reduces the impact on the lender if your home ends up in foreclosure.

If you have a 20% down payment, you automatically get to the desired loan-to-value ratio, and can usually see a lower interest rate. When applying for a refinance or a home equity loan, a desirable loan-to-value ratio will also help you with a lower interest rate.

5) Loan Type: The type of loan you are getting matters as well. A variable rate loan, like an adjustable rate mortgage, generally starts out a little lower than a fixed rate loan, since the bank is hoping that interest rates will go up — meaning more money down the road.

A cash-out refinance loan generally carries a higher interest rate than a purchase mortgage, since a cash-out means you are taking more out against your home’s equity; this results in a greater risk for the lender.

A home equity line of credit that you tap repeatedly may have a variable rate, or a higher interest rate, as opposed to a fixed-rate home equity loan that is perceived as offering less risk.

6) Loan Program: Whether you’re borrowing using an FHA loan vs a conventional loan can affect your mortgage interest rate. An FHA loan, guaranteed by the government, often has a lower interest rate than a conventional loan. This is because the FHA insures the loan, reducing the risk to the lender. So, you might get a better rate than you would get under normal circumstance if you qualify for certain loan programs.

Lending Risk
In the end, the mortgage rate you end up with is all about the risk to the lender. A mortgage lender considers the facts of the loan, and then makes a decision on your interest rate based on how likely you are to default, and the amount of equity the home would have to cushion the costs associated with foreclosure. 

Your Interest Rate
These 6 factors aren’t the hard and fast rules for an interest rate calculator for every bank; each lender uses their own set of standards and these are some of the most common.  You can use them to estimate whether you’ll get a high or low interest rate relative to the market but the only real way to find out the mortage rate you can borrow money at is to fill out a mortgage application and get pre-approved for a specific loan amount.


Will this article help you save or earn more money? Get others like it simply by entering your email address below. Your email is used only for delivering daily money tips and you can opt out of delivery at any time. Click here to see all your free subscription options.


Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

All posts by


16 Responses to Home Mortgage Rates – 6 Key Factors

  • Marie

    I have been so blessed that I have been working with the best mortgage brokers, that is why I did not experience any hassle on handling such things.

  • Reese

    FHA mortgages are far better than traditional loans because of the following reasons:
    FHA mortgages can be availed even if you have a low credit rating.
    # FHA mortgages have payment options in case you have a delinquent account.
    # Traditional mortgages have higher interest rates as well as down payments.
    # Traditional mortgages are very strict with their qualifications.

  • realbench

    It used to be that if your loan-to-value ratio was too high you just had to purchase private mortgage insurance (PMI), but these days if your loan-to-value ratio is too high you just don’t get the loan.

    Good post

  • charlie

    Thanks to this helpful information about availing loans for home mortgages. Bank’s extension of loans to people made real property acquisition easier. In this time of crisis, when almost everything seems to be expensive for the wallet to bear, owning a house has almost come to impossible. But thanks to concept of loans. Now, even the average income market can live in a house they can call their “home”.

  • Parag

    The overall idea behind the amortization schedule is that the lender will get paid interest first before you can start paying off your mortgage and acquiring equity. The purpose of this idea is to protect the lender in case you default on your loan.


  • Mortgage Refinancing Mistakes | Money Smart Life
  • Home Buyers Guide | Money Smart Life
  • HSA Insurance
  • 5% Certificates at Pentagon Federal
  • Personal Finance Links
  • It's Good to Be Home!
  • Refinance Mortgage To Get A Better Rate And Save Money
  • Get Here September
  • Favorite Personal Finance Blog Posts #7
  • Morning Links: The Layoff Kings | The Dynamic Dividend
  • Tweets that mention Home Mortgage Rates – 6 Key Factors | Money Smart Life -- Topsy.com