How Are Mortgage Rates are Determined

Your mortgage rate is similar to a HUD (Heads-up Display) on a video game or monitor. You’ll see a simple and clean variable but you won’t see all the math and formulas that go into creating it. The reason I used a reference like that is to explain to you that the most important thing to know about determining your mortgage rates is that some elements are under your control and you can see them, and others are invisible and out of our control. Lenders oftentimes make adjustments to mortgage rates depending on how risky they think the overall loan is. It’s simple really, the riskier the loan, the higher the interest rate. These 2 factors have a lot to do with determining your mortgage rate.

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Credit Score

If you’re looking to score the lowest and best mortgage rates, you’re going to need to retain a score of around 740 or higher. These borrowers have the widest selection of loan options to choose from. If your score hovers somewhere around the 700 to 739 range, you can expect interest rates that are a bit on the higher side. For borrowers with credit scores down near 620 to 699, the rates for a mortgage are even higher. They might be so high in fact, that these borrowers might find it difficult to obtain larger loan amounts. If your score falls under 620, your options are slim and rates are very high.

Loan-to-Value Ratio

The loan-to-value ratio measures the mortgage total in comparison to the home’s value or price. If you buy a house for $200,000, put $40,000 down, and get a $160,000 mortgage, you’re borrowing 80% of the home’s value, so your loan-to-value ratio is 80%.

If your loan-to-value ratio is greater than 80%, it would be considered to be rather high, which puts the lender at a bigger risk. This could end up causing higher mortgage rates, especially when you factor it in with a lower credit score.