What Determines Your Mortgage Interest Rate?

Why two buyers can receive different rates

If you are buying a home in San Diego, Riverside or elsewhere in Southern California, the rate you see advertised is a starting point for questions. It is not a personal loan offer.

Your financing choices and the details of your application affect the rate available to you. A useful conversation starts with the home you want to buy, the funds you have available and the payment you can comfortably manage.

Credit, loan amount and down payment

Lenders use credit information when pricing a mortgage. Stronger credit can help you qualify for a lower rate, but the score alone does not determine your offer.

The amount you borrow and the size of your down payment also matter. Loan-to-value compares the loan amount with the property's value. A larger down payment changes that relationship, but it does not guarantee a lower rate in every situation.

Ask for the full cost of each option, including any mortgage insurance. Keeping enough money for closing and savings matters alongside the down payment.

The loan program and repayment term

Conventional, FHA and VA loans have different requirements and costs. A lower rate on one program does not automatically make it the least expensive option. Compare any mortgage insurance, program fees and closing costs as well.

A shorter repayment term, such as 15 years instead of 30, generally has a lower rate but a higher monthly principal and interest payment. Choose a term that fits your budget rather than stretching for the lower rate.

Fixed or adjustable rate

A fixed-rate mortgage keeps the same interest rate for the life of the loan. The principal and interest payment stays the same, although taxes and insurance can change your total payment.

An adjustable-rate mortgage may start with a lower rate, then change according to its terms. Ask when adjustments begin, how the rate is calculated and what limits apply. Make sure you can handle possible payment increases without assuming you will be able to refinance.

Points and lender credits

Discount points let you pay more at closing in exchange for a lower rate. One point equals 1% of the loan amount; it does not mean your rate drops by one percentage point. The rate reduction depends on the offer.

Lender credits connected to the rate usually work in the other direction: a higher rate helps offset upfront closing costs.

Ask for options with and without points or credits. Compare the extra cash needed now with the payment difference and how long you expect to keep the loan. There is no universal two-point limit that applies to every mortgage.

Market changes and rate locks

Mortgage rates can change while you are shopping. Offers prepared on different days may reflect different market conditions.

A rate lock generally protects the offered rate through a stated deadline, provided the application details stay the same. It is not a loan approval.

Before locking, ask:

• When does the lock expire, and does it cover the expected closing date?
• What happens if closing is delayed? Is there an extension fee?
• What changes to my application could affect the locked terms?
• If rates fall, is there any option to change the locked rate?

Get the terms in writing. A lock does not automatically give you a lower rate if the market moves down.

Compare more than the interest rate

The annual percentage rate, or APR, includes the interest rate and certain loan charges. It offers a broader cost measure, but it should not be your only comparison. An adjustable-rate loan's APR does not show its maximum possible rate.

For a useful comparison, request offers for the same loan amount, program and term over a similar timeframe. Review:

• Interest rate, APR and lock terms.
• Points, lender fees and lender credits.
• Monthly principal and interest, plus any mortgage insurance.
• Property taxes, homeowners insurance and the full estimated payment.
• Closing costs and cash needed to close.

A lower estimate for taxes or insurance does not mean the lender offers cheaper financing. Ask about differences so you can compare the loan costs fairly.

Talk through your options

You do not need to understand every mortgage term before asking for help. Bring your questions and tell me what matters most to you: the monthly payment, cash needed at closing, long-term costs or a combination of those goals.

As a mortgage broker, I can help you review available loan options and understand the tradeoffs. The right choice depends on your circumstances.

Call or text 909-581-2564, or schedule a mortgage call. When you are ready, you can start your application.

About James Taverner

James Taverner is a California mortgage broker focused on helping first-time buyers understand the mortgage process. DRE #01982735 | NMLS #1369773. Broker Associate with Ever Stewart Alvarado, DRE #01346092 / Lunar Home Loans, Company NMLS #1986844. Licensed in California only. Equal Housing Opportunity.

Loan approval, program availability, rates and terms depend on borrower qualifications, the property, lender requirements and market conditions. The lender makes the final approval decision.