What Determines Your Interest Rate?

When shopping around for either a first home mortgage, or more likely a refinance in today’s low-rate market, it’s important to understand how your interest rate is determined. You’ll want to be able to consider all financial factors before committing to the biggest financial decision in your life! Not everyone gets the same rate, after all. There are a handful of factors that determine a borrower’s specific rate.


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1. The mortgage borrower you select

Different lenders can charge wildly different closing costs than each other. It shouldn’t surprise that the less a homeowner shops for a mortgage, the more likely they are to end up paying a higher rate than what they qualify for. Be sure to shop around to find the lowest rates. It also helps to check online reviews to see which mortgage companies have good customer service. 


2. Loan type

It may seem obvious if you’ve shopped for mortgages, but different loan types / terms have very different interest rates. You might want a 15-year fixed loan, a 30-year, or 20-year. Instead of fixed, you might want an adjustable rate mortgage, or “ARM”, which typically have lower rates than fixed scenarios. Whether your loan is categorized as conventional, VA, USDA, or non-QM also matters for your interest rate.


3. Credit score

Your credit score is determined using a variety of metrics to estimate your financial stability for the purposes of borrowing. A higher credit score will typically qualify you for a lower mortgage interest rate. Lower scores will bring loan level price adjustments, or “LLPAs” leading to a higher rate.


4. LTV

In the case of a refinance, your loan to value score, or “LTV” is measured by dividing your loan amount by your current home’s appraised value. Lower LTV scores typically lead to lower interest rates. For example, a home worth $600k with a $300k loan amount would be an LTV of 50%; 60% and below is considered “top tier” in the mortgage world, and will bring the best rates. With every 5% increment above 60%, your interest rate would increase (more LLPAs). LTV in mind, paying off more of a current home before refinancing is a great financial decision!


5. Property use

Whether the property at hand is a primary vs. secondary residence does not change your interest rate, but an investment property will be different. If you have, say, a rental condo in Hawaii, LLPAs will raise your rate.


6. Buying down

Your option to “buy down” the mortgage interest rate involves paying more in closing costs to secure a lower rate. Lenders will usually present you with an array of rate choices with varying closing cost scenarios; if you select a 30-year fixed loan, they’d show you a 3.25%, 3.375%, 3.5%, 3.625% and 3.75%. Options vary in increments of 1/8th percent. These are called “paying points”, expressed as a percentage of the loan amount. In the case of a $400k loan, paying 2 points ($8,000) would bring a 3.75% down to 3.25%.



If your goal is a low rate with low payments, then this list is a great way to think ahead! Consider your credit score, for example, before refinancing. Maybe time your refinance to ensure your LTV is below 60%. In terms of choosing a loan type / term, as well as buy down options, that’s where we come in. 

Make sure the loan officers you work with are providing the best service alongside very low rates. Luckily, per the 2010 Dodd-Frank Financial Reform Act, your loan officer will not be financially incentivised to steer you into the wrong mortgage program for their own benefit. You are free to evaluate the options that might be best suited to your financial situation! 

To check rates any time without speaking to a loan officer, feel free to check out our live quote generator.


Jason Vondrak

Company President

Prospect Financial Group

948 Garnet Avenue

San Diego, CA 92109

NMLS: 349089 | BRE: 01837707

Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.

"I've had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership."