A mortgage interest rate is the percentage lenders charge for borrowing money to purchase a home. The rate you qualify for depends on your credit score, loan type, down payment, and current market conditions.
Lenders assess multiple factors to determine your mortgage interest rate. These include:
| Rate Type | Description | Example Rate (as of 2023) |
|---|---|---|
| Fixed Rate | Stays the same throughout the loan term | 6.5% |
| Adjustable Rate (ARM) | Changes periodically after an initial fixed period | 5.5% (for the first 5 years) |
| Interest-Only | Pay only interest for a set period, then principal and interest | 6.2% (interest-only for 10 years) |
Many people assume mortgage rates are solely based on the federal funds rate. However, lenders also consider individual risk factors. For example, a borrower with excellent credit might secure a rate 0.5% lower than the national average, while someone with fair credit could pay 1% more.
To qualify for a better rate, focus on improving your credit score, saving for a larger down payment, and comparing offers from multiple lenders. Even a 0.5% difference can save thousands over the life of a loan.
For instance, on a $300,000 loan at 6.5% over 30 years, you'd pay $2,147 per month. At 7%, the payment rises to $2,248-a $101 difference monthly or $36,360 over the loan term.