The Lowdown on Loans – What Determines Your Mortgage Rate?

Understanding mortgage loans and interest rates can be confusing and frustrating for many homebuyers. It doesn’t help that most advertised rates are just a marketing ploy to lure you in.

In fact, a lender looks at several factors to determine an interest rate based on YOUR specific financial situation, including your credit score, your down-payment amount, your loan amount, and even the type of home you purchase.

The bottom line is- every loan scenario is unique, which means you might get a different interest rate than the person next to you (and the one you saw advertised).

No One-Size-Fits-All Interest Rate

Here are 4 important points to be aware of before you go shopping for a loan:

• Rates vary depending on the market and several borrower-specific factors. That’s what makes it complicated.
• There are tons of different banks, credit unions and lenders that offer entirely different types of loans and corresponding interest rates.
• The rates you see advertised are usually meant for someone with excellent credit, applying for an owner-occupied single-family home loan, with a big down-payment.
• Your scenario is unique, so it’s good to know about all the factors lenders are interested in when you apply for a loan.

Loan Purpose

The two purposes for a mortgage loan:

• A purchase money mortgage applies to the purchase of a principal residence, second home or investment property.
• A refinancing loan is when you want to obtain new financing for an existing loan. You will probably get a lower rate for a purchase money mortgage than a refinance.

Loan Amount

Your rate will be different depending on the size of your mortgage.

The current single-family conforming loan limit for most counties in Washington State is $726,200 (an increase over the 2022 cap of $647,200). In the more expensive Seattle-area counties of King, Pierce, and Snohomish, the single-family loan limit has been increased to $977,500 for 2023.

Washington State conforming loan limits are determined by the Federal Housing Finance Agency (FHFA). If prices go up considerably in a certain county, FHFA may increase the corresponding loan limits to keep pace with rising home values. That’s what happened from 2021 to 2022.

Credit Score

This one is pretty simple: the higher your credit score, the lower your rate.

This is the single most important factor to determining your mortgage rate. But your score isn’t the only thing that matters; what it says on your credit report matters too!

Loan-to-Value Ratio

The loan-to-value ratio is the loan amount as a percentage of the total appraised value of the property. The higher the loan-to-value percentage, the higher your mortgage rate will be.

Property Type

If you’re purchasing a single-family residence, the mortgage fees will be slightly lower than if you were to purchase a condo. This is because a condo is part of a larger complex, so if other owners in the complex miss a payment or there are vacant condos, your condo will lose value. Interest rates will be even higher for a co-op.

Occupancy Type

There are three types of occupancy: owner-occupied, second home or investment property.

A second home will have slightly higher mortgage rates and an investment property may be even higher. This is simply because there’s less of a chance that a homeowner will walk away and miss payments on their own residence.

Debt-to-Income Ratio

This is how a bank determines how much home you can afford.

It is your monthly liabilities divided by your monthly income. This gives them a percentage, the lower the percentage, the lower your mortgage rate.

First Steps to Take

This is all about risk. Lenders base the interest rate they give you on how much risk they’re undertaking by loaning to you. That’s why I will always give you as much information as possible about the process and how to prepare your finances.

I recommend you shop around for your mortgage rate! Again, different lenders will offer different loans and rates, so the more you know, the better your rate will be. I have great lenders I can connect you with that will help get your rate down as much as possible.

All of this can feel overwhelming and complicated, but don’t worry – you’re not alone! I’m here to answer all your questions and lead you step-by-step to your best deal.