How Are Mortgage Rates Determined?

When you visit a lender—whether online through platforms like MaisonLink or in person—you’ll often encounter advertised mortgage interest rates. However, it’s important to understand that not everyone will qualify for these rates.
Why? It all comes down to risk assessment. The greater the perceived risk that a borrower might not repay the loan, the higher the interest rate a lender is likely to charge. Lenders evaluate this risk based on a variety of factors—some within your control and others beyond it.
Key elements that influence your interest rate include your credit score, debt-to-income ratio, employment history, loan amount, down payment, and the type and term of the mortgage. Even seemingly minor differences in these criteria can lead to significant variations in the rate you’re offered. Over the life of a mortgage, even a small increase in interest can result in paying thousands of dollars more.
The encouraging news for prospective homebuyers is that mortgage rates are often negotiable. That’s why it’s wise to shop around and compare offers from multiple lenders. Tools available on platforms like MaisonLink can help you evaluate different rates and loan structures. Some lenders may be willing to improve their terms to earn your business, possibly offering a more competitive interest rate or reduced fees.
Informed comparison and strategic negotiation can empower you to secure more favorable loan conditions—potentially saving you a substantial amount over the term of your mortgage.

What factors determine interest rates;

Lenders weigh several factors in determining your interest rate, including:

Credit Score: The Most Influential Factor

Your credit score is one of the most significant determinants of the mortgage interest rate you’ll be offered. Most lenders assess creditworthiness using FICO® scores, which range from 300 to 850.
A score of 720 or higher has traditionally been the benchmark for accessing more favorable interest rates without pricing adjustments. However, borrowers with scores in the upper 700s or 800s often qualify for even lower rates, reflecting their reduced credit risk.
If your credit score is on the lower end of the spectrum, you may face challenges qualifying for a mortgage—or may need to offset the risk with a larger down payment, depending on the type of loan you’re applying for. Improving your credit score before applying can significantly impact the cost of your loan over time.

Loan-to-Value Ratio (LTV) and Down Payment

Another key factor influencing your mortgage rate is your loan-to-value (LTV) ratio—the percentage of the property’s value that you are borrowing.
The LTV ratio is calculated by dividing the loan amount by the appraised value of the home. A larger down payment reduces the LTV, which in turn makes you a less risky borrower in the eyes of the lender. Lower LTV ratios typically result in better interest rates and more favorable loan terms.
In addition, your LTV ratio can determine whether you are required to pay private mortgage insurance (PMI). For conventional loans, borrowers generally need to make a 20% down payment to avoid PMI.
Government-backed loans offer more flexibility:

• FHA loans allow LTVs up to 96.5%, enabling borrowers to purchase with as little as 3.5% down.
• USDA and VA loans may offer up to 100% financing, meaning no down payment is required, depending on eligibility.

Loan Purpose, Type, and Interest Rate Structure

Your mortgage interest rate can vary significantly based on the purpose of the loan—whether you’re purchasing a home, refinancing an existing mortgage, or opting for a cash-out refinance. Generally, purchase loans may qualify for more favorable rates due to incentives available through certain programs. In contrast, cash-out refinances typically come with higher interest rates, particularly for borrowers with lower credit scores or higher loan-to-value (LTV) ratios.
The loan type and interest rate structure also play a critical role. Fixed-rate mortgages tend to have higher initial rates compared to adjustable-rate mortgages (ARMs). However, ARMs—such as 3-, 5-, or 7-year terms—often start with interest rates approximately 0.5% lower than equivalent 30-year fixed loans, making them attractive for short- to mid-term homeowners.

Loan Term Length

The length of the loan term also impacts your interest rate. Mortgages with terms of 20, 25, or 30 years typically carry similar rates, whereas shorter-term loans—such as 10- or 15-year mortgages—generally offer lower interest rates, often about 0.5% less than their 30-year counterparts. While monthly payments may be higher with shorter terms, the total interest paid over the life of the loan is significantly reduced.

Loan Amount

The size of your mortgage can also affect your rate. Smaller loan amounts often come with slightly higher rates, as lenders still incur fixed costs to process and service the loan. Conversely, larger loans that fall near the top end of the conforming loan limits—those eligible for purchase by Fannie Mae and Freddie Mac—can sometimes secure slightly lower interest rates, as they tend to be more profitable for lenders.
However, jumbo and super-jumbo loans—which exceed conforming limits—usually carry higher interest rates due to the increased risk and the lack of backing from government-sponsored entities.

Geographic Location

Your location can also influence the interest rate you receive. Lenders assess regional factors such as the local default rate, prepayment trends, and state-specific foreclosure laws. Areas with higher borrower risk or restrictive lending regulations may result in higher interest rates for homeowners.

Smart Strategies to Lower Your Mortgage Interest Rate

Looking to secure a lower mortgage rate? The key lies in improving your overall financial profile to appear as a lower-risk borrower in the eyes of lenders. Here are three effective ways to enhance your mortgage terms:

1. Raise Your Credit Score

Your credit score is one of the most influential factors in determining your interest rate. FICO® scores range from 300 to 850, with higher scores qualifying for more favorable rates.
If you’re unsure of your score, many credit card companies and banks now offer free access to your FICO score as a customer benefit. Alternatively, you can obtain it directly through the official FICO website.
If your score appears lower than expected, begin by reviewing your credit reports for errors. You’re entitled to a free annual credit report from each of the three major bureaus—Experian, TransUnion, and Equifax—via AnnualCreditReport.com or by calling 786-735-2806. Should you find inaccuracies, file a dispute with the appropriate bureau and include supporting documentation to expedite the process. Keep in mind that corrections may take time, so start early.

2. Increase Your Down Payment

Making a larger down payment can significantly improve your loan terms. A higher down payment reduces your loan-to-value (LTV) ratio, which signals to lenders that you present less risk of default. As a result, lenders may offer a lower interest rate and better terms overall.
Consult a trusted lender or use resources like MaisonLink to explore how different down payment amounts and credit scores can impact your mortgage rate and total closing costs.

3. Buy Mortgage Points

Another way to reduce your interest rate is by purchasing mortgage points—also known as discount points.
Each point typically costs 1% of your total loan amount (e.g., $1,000 for every $100,000 borrowed) and allows you to pay interest upfront in exchange for a lower rate over the life of the loan. This strategy is especially beneficial if you plan to stay in your home for many years, as the long-term savings can outweigh the initial cost.

Final Thoughts

By understanding how lenders determine mortgage interest rates—and taking proactive steps to improve your creditworthiness—you can position yourself for significant long-term savings. Platforms like MaisonLink can help you compare lenders, run mortgage scenarios, and discover personalized ways to secure the best possible financing for your home.