Mortgage rates have gotten a lot of airtime in the media recently. Currently near all-time lows, many people are shopping for a new mortgage right now, and rightly so! With the opportunity to reduce monthly payments, access equity to pay other bills or complete renovations, or reduce a loan term, it’s a great time to be looking into mortgage rates and taking notice of what’s out there. Many people are trying to get the best mortgage rate, but few people know how mortgage rates are determined, and why they vary so much from lender to lender and customer to customer.
The 2 biggest factors that go into mortgage rates are equity and credit scores. For conventional loans especially, rates are largely driven by how much home equity your mortgage loan is tapping into. Higher LTV loans (loans using a lot of home equity) tend to have higher rates than lower LTV loans. Other aspects of equity come into play as well. Have a 2nd mortgage? Conventional mortgage loans have rate adjustments for that. Using that home equity to take cash out of your home rather than just seeking out a reduced rate? You guessed it – rate adjustments!
On top of the amount of equity used, credit scores play a huge factor in many loan products, especially conventional loans. A rate for a borrower with a 620 FICO score can be vastly different than a borrower with an 820 FICO, even with all other loan details being equal. The highest rates for conventional products tend to be for borrowers seeking high LTV loans with low FICO scores. The best rates tend to be offered to high FICO scores with large down payments or large amounts of equity.
On top of those 2 factors, there are various other things that determine rate – borrowers seeking alternative (nonQM) loans like bank statement products or investment property products that qualify on debt-service of a property will generally see higher rates.
Government loans (FHA, VA, USDA) are great programs that can offer competitive rates that are not as sensitive to LTV and rate. While rates will vary depending on credit score, they don’t vary as much because many of the rate adjustments present on conventional loans do not exist in government lending. So for someone with less than perfect credit, this type of loan product may still offer an extremely competitive rate.
Rates vary substantially from lender to lender and borrower to borrower, but in general – better credit, larger down payments, government loans (VA mortgage loans usually offer extremely competitive rates), and full doc (income derived from W2s and paystubs instead of alternative documentation) loans tend to offer the best rate.