What Factors Affect Your Mortgage Costs?


If you’re like most prospective home buyers, you’ll want to know all of the costs that come with a mortgage and get the lowest interest rate possible. Understanding what factors are involved will help ensure you’re ready to buy and that you’re prepared for the entire process. While it’s a good idea to use a house payment calculator to determine what you can afford, there is a lot more involved than that.

Saving even just a fraction of a percent on the interest rate can save you thousands of dollars over the life of your home loan so you’ll definitely want to shop around and compare offers. When you’re armed with information, it’s much easier to have confidence when it comes to talking with lenders and asking the right questions. 

The Location

Lenders may offer slightly different interest rates depending on the state you’ll be buying your home in. For example, a 2019 study by HousingWire found that the average interest rate across the country was 4.84 percent, with the highest at 4.96 percent and the lowest 4.74 percent.

The lowest average interest rates were in Massachusetts, Washington, New Jersey, and California, while the highest were in Arkansas, Iowa, and New York.

Down Payment

The larger down payment you make, the lower your interest rate is likely to be because the lender is taking on a lower level of risk as you have more stake in the home.

If possible, put down at least the recommended amount of 20 percent down. If you can’t, you’ll have to buy private mortgage insurance (PMI) that protects the lender if you can’t make your payments, adding to the total cost of that monthly loan payment.

The Duration of the Loan

The loan term refers to how long you have to repay your loan. Shorter term loans typically have lower interest rates which means a lower overall cost but you’ll have to make higher monthly payments. 

Fixed Rate or Adjustable Rate

The type of interest rate matters too. A fixed interest rate is just what it sounds like – it won’t change over time. An adjustable rate usually has an initial fixed period but after that it goes up or down based on the market. What that means is that you might initially get a lower adjustable rate loan but it could increase significantly in the future.

Your Credit Score

One of the biggest factors affecting your interest rate is your credit score. The higher it is, the lower your interest rate will be as lenders use that score to predict how reliable you will be when it comes to keeping up with your monthly payments. As your credit score is calculated from the details that are in your credit report.

If there are any errors you’ll want to dispute them so that they can be removed, raising your score. As this can take time, be sure to obtain your credit reports from all three major agencies: TransUnion, Experian, and Equifax, as early in the homebuying process as possible.