You might remember our previous post and that we discussed that when you apply for a mortgage, lenders try to determine how much risk you represent. That risk shows up in the form of the interest rate the lender will charge you. So, lets take a look into how your interest rate is actually determined by looking at the areas the lender considers.

The seven factors that determine your mortgage interest rate:

Your Credit Score 

You won’t be surprised to know that your credit score has a huge influence on the interest rate that your lender charges you for a home loan. The higher your credit score, the lower the interest you are charged.

It’s a great idea for you to know your credit score before you start shopping around for a home loan. You can find it at: www.annualcreditreport.com.

If you are planning to buy a home in the future, you should take the time to understand what’s in your credit report, dispute errors, and take steps to raise your credit score (and lower your interest rates at the same time).

The Home’s Location

Most people don’t understand that your home’s location is a determining factor for your homes mortgage interest rate. If you are using an online tool to help you estimate an interest rate, be sure to use one that takes into account the state in which you live.

The Amount of Your Home Loan

Subtract the amount of your down payment from the price of the home and you will have the amount of your home loan. Your lender may charge extra interest if you have a very small or a very large home loan.

Your Down Payment

Do you have a big down payment? Many lenders prefer buyers with a large down payment because they represent a smaller risk. Lower risk translates into a better interest rate for the buyer.

The Length of Your Loan

Other wise known as the term of your loan, how long you have to repay your loan will figure into the interest you are charged. Shorter loans tend to receive smaller interest rates than longer loans.

Fixed Rate vs. Adjustable Rate Loans

Adjustable rate loans may start our with a lower interest rate than a fixed rate loan, but after the initial fixed period, adjustable rate loans are subject to the whims of the market and can see increased interest rates very quickly.

Fixed Rate vs. Adjustable Rate Loans

Are you looking at a conventional mortgage or an FHA, VA, RD or other type of home loan? Your lender will probably charge different interest rates based on the type of loan that you use.

Want to experiment with these factors and see how they affect interest rates? The Consumer Finance Protection Bureau has a great tool that allows you to do just that. Try It Out!