Interest Rate Factors:
    
Credit Score - Your credit score as compiled by one of the 3 credit bureaus will determine if you get the "A" credit rating interest rate (usually the lowest rate) or if your interest rate will have to be a little higher due to your lower credit score. A lower credit score tells the lender that you are a little more risk and therefore he needs to charge you a little higher interest rate to compensate for that extra risk. Even though you don't consider yourself a higher risk, you will not be able to convince the lender to lower your interest rate as they have specific guidelines that determine the rate based on the credit score.
    
Length of Mortgage - If you decide to borrow funds for a shorter term than 30 years, the lender will offer you a lower interest rate. A 10 year mortgage will have an interest rate that could be as much as 1 percentage point lower than the 20 or 30 year mortgage. A relatively new mortgage product is the 40 year maturity loan, which so far has had about the same interest rate as the 30 year, but because the loan is amortized over a longer period of time, the monthly payments are actually lower than the 30 year....but of course the total interest you pay over the life of the loan is higher.
    
Fixed or Adjustable Rate - Because the fixed rate is the rate you pay for the entire life of the loan, the lender usually asks for a higher rate than an adjustable rate. (The only time this is not true is when we have want is called an "inverted yield curve, when short term rates are higher than long term rates in the Bond market). And because the adjustable rate allows the lender to adjust the interest rate higher if interest rates move up during the life of the mortgage, the lender will start you off with a very low, or "introductory rate" for the first 3,6,9 or 12 months of the loan. The fixed rate will be reflective of where the 30 year T-Bond yield is trading in the Government Bond Market. Because many lenders actually sell the mortgages they issue, they have to issue the mortgage with an interest rate that is competitive with other 30 year obligations like the T-Bond, GNMA's and other mortgage backed securities. The fixed rate is based on two factors: 1). An "index" that is usually one that S&L's use for short term rates, and 2). A "margin" that the lender ADDS to the index. These 2 factors are added together to arrive at the interest rate you pay on your adjustable mortgage. As example, if the index ( which could also be the short term T-BILL rate) is 2% and the margin is 2.5% then the rate on the adjustable mortgage for that particular period is 2% + 2.5% = 4.5%. Adjustable rate mortgages have a provision that dictates just how often the interest rate adjusts. Some adjust every 3, 6,9 or 12 months while others have a fixed interest rate for the first 1,2,3,4 or 5 years and then adjusts every 12 months.
    
Discount Points - If you want to lower the interest rate on your loan, lenders will allow you to pay a "Discount Point" up front. A Discount Point is 1,2,3 or 4% of the principal amount of the loan. As example, 2 Discount Points on a $100,000 loan would be 2% of $100,000 or $2,000. If you pay the lender $2,000 up front, he will lower the interest rate on your loan. How much he lowers the rate is up to the lender but should be somewhere between 1/8 to 1/2 of 1 percent, depending on how many Discount Points you pay. Therefore you need to know how much the rate will be lowered for each 1 Discount Point. A 1/4 of 1 Percentage Point reduction on $100,000 is equal to about $250 per year in interest....so, if the lender grants you a 1/4 of 1 percentage reduction for 1 Discount Point, it will take about 4 years to earn the $1,000 back in interest savings.
    
Closing Costs or Fees-  If you ask the lender to include the closing costs or fees into the principal of the loan instead of paying them yourself, he may raise the interest rate on the loan. As example, if the closing costs are 2% of the principal amount of the loan, or $2,000, and you ask them to be included into the loan, then you will be "financing" the closing cost. If the lender raises the interest rate by 1/4 of 1 percentage point, then you will be paying about $255 in additional interest per year. If you can invest the amount of the closing costs or fees at a higher interest rate than the rate on your mortgage, then it may make sense to finance the closing costs or fees.
    
Type of Mortgage - Balloon Mortgage, Interest Only Mortgage, 125% Loan to Value Mortgage, etc., etc. all have different interest rates. And each lender may charge a different interest rate for each mortgage type, so the type of mortgage has a lot to do with the interest rate. Since there are so many different mortgage types, we will not try to go into each one here.

The Lender - Who the lender is will also make a difference in your interest rate. As example, many credit unions, whether they are State or Federal offer mortgage programs. And since they are considered to be more of a not-for-profit entity, they can charge lower interest rates on their mortgages since they do not have stock holders or investors who insist on big profit margins. If you are a member of a credit union ask what kind of mortgage programs they offer. If you qualify for a Government or Government Agency loan, then your rate may be lower as well since many Government sponsored programs offer low income families mortgages to help them become home owners. Veterans will also receive lower interest rates from VA loans and farmers qualify for programs that offer lower rates as well. Because there are so many Federal, State and Local programs available, you need to investigate the program that you may be qualified for. This can be do on this site or by using the search feature on the internet.
    
Interest Rate Markets - U.S. Treasury Securities, Corporate Bonds, Municipal Bonds and Mortgage-Backed Securities all trade in organized markets. These markets determine where interest rates are by virtue of competing investments and where the Federal Reserve sets Fed Funds. If competing markets like the stock market is doing well and returns on stocks are high, usually investors will move out of Bonds into Stocks, which will cause the interest rates on Bonds to go up to attract investors back into the Bond Market. Since many mortgage lenders sell the mortgages they issue into the market, then they have to raise the interest rate on the mortgage so they can be sold at competitive rates in the market. And when the Federal Reserve changes Fed Funds, which is the rate financial institutions are charged to borrow short term funds, that has an effect on short term T-Bills. And since short term T-Bills like the 1 Year T-Bill is used by many lenders as the "Index" for Adjustable Rate Mortgages, any change in Fed Funds, which changes T-Bills will effect Adjustable Mortgage Rates.
    
    
Just what is "APR"?
    
Because there are so very many "factors" that effect interest rates on mortgages as we have seen above, it is very difficult for the average consumer to fully understand just what his or her interest rate really is. This is because lenders and brokers can add "discount points", "fees", and other costs to the mortgage that effects what the consumer actually pays for the mortgage. Therefore, the Government instituted a law requiring lenders and brokers to calculate the actual "Annual Percentage Rate" (APR) the borrower is paying when ALL the discount points and fees are INCLUDED. "Closing Costs" are NOT included in this "APR" calculation so understand that these costs are extra. Therefore, when ever you see an ad or are quoted an interest rate on a mortgage....always ask what the "APR" is to fully understand what that mortgage is really going to cost you.
    
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