Mortgage Rate Math

Shopping around for the best possible mortgage terms is an important part of the home buying process. Even one-half of a percentage point can make a difference of tens thousands of dollars over the life of the mortgage. For example, if you take out a 30-year mortgage loan on a $500,000 house with a 20% down payment at 3.5% interest vs. 4% interest, you could save more than $40,000 over the life of the loan! Play around with this online tool to see how small changes in the interest rate can affect your overall payment.

Mortgage rates can be a bit of a mystery—especially for first-time homebuyers—so here’s an overview of the most important factors.

Your FICO Score

This is the part of the mortgage equation that should come as no surprise. From a lender’s perspective, your financial history is the best indicator of whether you’ll be a stable, responsible borrower. It’s the primary factor in determining your mortgage rate, so if you’re planning on purchasing a home in the near future, concentrate first and foremost on improving your FICO score.

Location and Size Matters

“Location, location, location” is an old cliché in real estate, but it also applies to mortgage rates. The city, county, and state that you live will factor into your mortgage rate. Mortgage rates can also vary among local lenders and the size of the loan will come into play. The more money you borrow, the higher your interest rate is likely to be, unless you’re also increasing your down payment.

Loan Length and Type

Lenders incentivize shorter mortgage terms with lower mortgage rates, so you’ll get a more favorable rate for a 15- or 20-year mortgage versus a 30-year mortgage. If you can afford the higher monthly payment, you’ll pay much less in interest over the course of the loan term.

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