Springtime Home Mortgage

What Is A Good Mortgage Rate And How Do You Get The Best One?

Sidney Richardson8-minute read

August 10, 2021

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If you’re buying or refinancing a house, you want to get the lowest mortgage rate possible. After all, it can be argued that mortgages are a commodity – you won’t get special benefits for paying more every month.

But how low do you need to go to get a “good” mortgage rate? Is there anything you can do to make sure you get the best rate possible? Looking at the factors that influence your rate can help.

What Is A Mortgage Rate?

Mortgage rates determine how much interest accrues on your home loan. The higher your rate, the more interest you'll compile and the more money you'll end up paying for your house.

From a financial perspective, one of the single most important things you should be aware of is whether you have a fixed-rate mortgage or adjustable rate mortgage (ARM). Let’s take a look at what that means.

Fixed Rates

With a fixed-rate mortgage, the amount of your monthly payment that goes toward principal and interest usually stays the same for as long as you have the loan. Although over time you’ll eventually pay more toward principal than interest, the actual amount of the payment usually never changes.

The advantage of a fixed-rate mortgage is certainty. Your payment is going to stay fairly consistent. There are also a variety of options for your payoff term.

Adjustable Rates

ARMs work a bit differently. They typically start with a lower rate. This “teaser rate” remains fixed for the first several years of the loan – typically a period of 5, 7 or 10 years. After that, the rate will periodically adjust up or down according to the market.

ARMs may temporarily give you a lower rate, but they also come with a higher level of risk, so it’s best to use them only if you know you plan to move by the time the rate adjusts or if you’re totally comfortable with the possible fluctuation.

Factors Affecting Your Mortgage Rate

Let’s go over the factors that may affect what you can get for an interest rate on your mortgage. 

The Market

To understand how mortgage rates are set, it helps to know a little bit about the mortgage market. When you get a mortgage, it's usually purchased by a mortgage investor and made available on the bond market as part of a mortgage-backed security (MBS).

An MBS is generally considered a safe investment because it’s assumed borrowers are going to do their absolute best to make their mortgage payments every month. However, like most safe investments, the rate of return tends to be lower.

If people are feeling optimistic about the economic future of the country and the world, they tend to put more money in the stock market, which is riskier, but this also offers a greater potential reward. If people are feeling more pessimistic, on the other hand, they turn to safer assets in the bond market, including MBS.

Yields run inversely with demand in the MBS market. The higher the demand for MBS, the lower the yield needs to be to attract investors. Lower yields mean lower mortgage rates. 

Type Of Loan

Certain loans are more likely to have higher rates. Generally, lower qualifications mean a higher rate.

Let's take a look at a few different classes of home loans.

  • Conventional loans typically have lower interest rates because they usually have higher credit score and down payment expectations.
  • FHA mortgages are easier to qualify for. You can have a lower credit score and higher debt-to-income ratio (DTI). Your mortgage rate might be higher than for other government-backed loans, but it should be competitive with conventional loan rates.
  • VA mortgages are for qualifying veterans and surviving spouses. Interest rates on these loans may be slightly lower.
  • USDA mortgages may have lower interest rates, but you must live in a rural area to qualify for one.
  • Jumbo loans are riskier for lenders, so they can have higher interest rates, but depending on market conditions, you could have a jumbo loan with a competitive rate or even a lower-than-average rate.

Whether your loan is fixed-rate, adjustable or variable will naturally also affect your mortgage rate. 

Primary Vs. Second Mortgages

If you take out a second mortgage, it will also impact your rate. To access equity, some homeowners take out a second mortgage. Because your first mortgage takes priority, in the event that you run into financial trouble, your primary mortgage will be paid off first.

Due to the increased risk associated with these loans, second mortgages have slightly higher rates than primary ones. By contrast, in a cash-out refinance, you take out equity based on your primary mortgage and you can get a lower rate. In addition, you can roll your second mortgage into your refinanced primary mortgage. 

Income

Your income and DTI have an impact on your mortgage rate as well. You don’t have to be a personal finance wizard to guess the following: Higher incomes likely mean you’ll have more resources available. This doesn’t mean you have to be a millionaire to purchase a $250,000 house, but the lender wants to see that you can comfortably make your monthly payment. This is determined by looking at your DTI ratio.

We’ll get deeper into this in the credit section below, but for right now, know that higher incomes mean more money to pay off debts, including your mortgage. 

Property

Again, interest rates are all about risk. When you buy a house, you know what you can afford and plan to make the payments. If you fall on hard times, however, you’re likely to pay off certain things before others.

Interest rates are higher for second homes and investment properties, because if something were to go wrong, you’d likely make the payment on your primary property first.

Interest rates are also different based on whether it’s a single-family property or a multi-unit complex like condos. 

Assets

Higher assets are another thing that can work in your favor. Assets are things not related to your annual income that could be used to help pay off your mortgage. This could be proceeds from the sale of property, stocks, bonds, mutual funds, etc.

Obviously, the more assets you have, the greater your ability to repay and the lower your interest rate will be. 

Credit

All lenders look at your credit score and history. In general, the higher your FICO® Score, the lower your rate. You keep your credit score up by making timely payments for your house, car, credit card and so on.

Your credit report is also used to determine how much of your monthly income goes toward making debt payments. Let’s say you make $5,000 a month and you pay $1,250 of that toward your student loans, house and car payments. Your DTI is 25%. The lower this ratio is, the less risky you look for the lender – and your rate will be lower.

For more on this topic, check out this post on how your credit score affects your mortgage eligibility and loan application. In short, though, those with the best credit often qualify for the best rate.

What Is A Good Mortgage Rate?

You know what goes into calculating your rate, but what's the magic number? How low does your interest rate have to be to qualify as “good”?

Unfortunately, the answer isn't necessarily all that straightforward. After reviewing all the factors that influence them, you’ll see that interest rates are complicated. “Good” is usually a relative term when it comes to rates, so let's look at a few ways to level-set. 

Current Market Rates

A “good” interest rate can mean a rate that is low relative to the current market. You can get a sense for this by looking at today's rates and seeing what typical rates look like right now.

If you're curious, you can also take a look at historical rate data to see how much interest rates have changed over the years. What was good in the 1970s, for example, is going to be very different from what is considered good now. 

Your Finances

Another way to talk about getting a good mortgage rate is to think about getting the best rate you can, given your financial situation. You know that your interest rate depends on your IPAC (income, property, assets and credit), so you can look at getting a good rate as getting the lowest you can, given how you stack up by those metrics.

If you’d like to compare options, you can try shopping around to see what different lenders can offer you to get an idea of what your best interest rate is likely to be. 

Today's Mortgage Rates

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How To Get The Best Or Lowest Rate

With mortgage rates, lower is better. So, how do you go about securing a low one? There are a few strategies you can employ to get the best rate possible. 

Shorten Your Loan Term

You can save a lot of money if you shorten your term from 30 to 15 years. Even if you shorten to a term like 27 years, you can get a lower interest rate in addition to paying off your mortgage sooner because investors don’t have to project inflation as far out.

Although your monthly payment will be higher, you could potentially save tens of thousands in interest over the life of the loan. Not only will your interest rate be lower, but you’re also benefiting from the fact that you pay more toward your mortgage balance faster than you would on a traditional 30-year loan. 

Pay Off Debt

While you don’t want to close every account, it can be helpful to pay off certain debts. Taking this action will decrease your DTI and free up more money for you to spend on your monthly mortgage payment. Less debt can mean a lower rate. 

Prepaid Interest Points

You can buy your rate down by prepaying interest at closing. This prepaid interest comes in the form of mortgage points, or discount points. One point is equal to 1% of the loan amount (e.g., on a loan amount of $100,000, a single point is $1,000). You can purchase points in increments down to 0.125 points. Many of the interest rates you see advertised have a certain number of points attached to them.

Prepaying this interest will get you a lower rate. The trade-off here is that you have to stay in the home long enough to reach a break-even point where you save money. If buying two points on a $250,000 mortgage (two points equals $5,000) saved you $300 per month on your mortgage payment, you’d have to stay in the home 17 months to break even. If you plan on staying in the house for a while, though, it’s a good way to save money. 

Higher Down Payment

A higher down payment at closing will get home buyers a lower rate. Putting down a significant portion of the purchase price lowers the relative risk for a lender. The lower your loan-to-value ratio (LTV), the more you’re considered a good investment. Obviously, the higher your down payment, the less a lender has to give you to afford the home.

The Bottom Line: Better Finances Equal Better Rates

Simply put: The better your financial profile, the better rate you’ll get. When you receive a quote for a rate, it’s unique to your personal situation. That means it can be hard to compare your rate with someone else's. Instead, you should focus on getting your best possible rate.

Now that you’re a mortgage rate expert, you can review your loan options with confidence. Try out our mortgage calculator to see how different rates might affect your monthly payment, or, if you're ready, you can apply online now to get started on your mortgage.

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Sidney Richardson

Sidney Richardson is an intern writer covering homeownership, mortgage and lifestyle topics. She is a senior at Oakland University pursuing a degree in journalism and advertising.