What Do Banks Look for When Setting Your Mortgage Rate?

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The biggest loan you are likely to get is a mortgage. Because mortgages are so large, the interest charged can have a big impact on your finances. Over the course of a mortgage term, you can pay hundreds of thousands of dollars in interest. Other than shortening your mortgage term or borrowing less, the best way to reduce your cost is to qualify for the best possible mortgage rate.

So, how do you get the best mortgage rate? By thinking like a lender. Here are some of the things a bank looks for when it’s deciding what mortgage rate you should have:

National Average

The starting point for any mortgage rate offer is the national average. Each week, the average rate across the country is published. Mortgage rates are influenced by market forces as well as the yield on the 10-year Treasury. However, the rate you actually end up with depends on the local situation, as well as your individual financial situation.

Your Credit Score

The most important factor in setting your mortgage rate (at least, the most important factor you control) is your credit score. Your credit score is your financial reputation. It gives banks an idea of what sort of risk you represent. If you have a low credit score, you are considered more likely to default on your loan, losing the bank money. A high score, though, means that you are likely to be reliable. Banks won’t be as worried about you defaulting, so they’ll award you a lower interest rate. Taking care to keep a good credit score can help you get the best rate possible.

Your Income

How much money you make matters. The bank doesn’t want to give you a loan that you can’t afford because you might reach a point where you won’t be able to make your payments anymore. If you have a loan payment that is only about 30 percent of your income, you will probably get a lower interest rate. If, however, your payment is 40 percent of your income, the bank is a little more concerned that a setback could make it difficult for you to meet your obligation. You’ll be charged a higher interest rate as a result.

Your Down Payment

The bigger your down payment, the lower your interest rate is likely to be. When you have a bigger down payment, you have more “skin in the game.” You stand to lose more if you default. When you get a loan that doesn’t require a down payment, the bank takes on all the risk, and, as a result, charges a higher interest rate to make up for it. Offer a larger down payment, and you’ll get a better interest rate quote.

Take the time to arrange your finances so that you are an attractive borrower, and you will be more likely to get the best possible interest rate -- and save tens of thousands of dollars on your mortgage.

About Miranda Marquit

Miranda is a freelance writer and professional blogger specializing in financial topics. Her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.

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