8 factors that can influence your mortgage rate

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Don't look now, but the bull market rally in housing has gone on for six full years. Back in late 2010, existing-home sales were pacing below 3.5 million annually, which was down by about half from where they sat prior to the Great Recession. Since 2010, though, existing-home sales have climbed at a pretty steady pace, reaching 5.47 million homes annually as of October.

While it's probably a stretch to call the U.S. housing market "hot," it's a pretty fair statement to suggest it's healthy. It's so healthy, in fact, that the National Association of Realtors' annual "Profile of Home Buyers and Sellers" survey showed that the share of first-time home buyers ticked up to 35% in 2016, which was the highest level since 2013, where it was 38%. Since lending rates have stuck near historic lows, the opportunity to buy a house with an attractively low mortgage rate is acting as a dangling carrot for buyers that may be on the fence.

What influences your mortgage rate

But, if you're planning to buy a home, or even refinance an existing mortgage, you need to be aware of the numerous factors that can influence your mortgage interest rate. Here are eight such factors.

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Image source: Getty Images.

1. Your credit score

Perhaps the best-known mortgage rate influencer is your credit score (also known as FICO score). FICO scores take five factors into consideration (with accompanying importance to your FICO score in parenthesis):

  • Your payment history (35%).
  • How you utilize your credit (30%).
  • The length of your credit history (15%).
  • New credit accounts (10%).
  • Your credit account mix (10%).

Though this may not be a precise formula, the gist is simple: Lenders want to feel comfortable about your ability to pay back what will likely be the largest loan of your life. If you make your payments on-time, use less than 20% to 30% of your available credit, keep good-standing accounts open for long periods of time, avoid opening too many new accounts, and demonstrate that you can handle both installment loans (e.g., auto or student loans) and revolving credit (e.g., department store credit cards), chances are you'll have a respectively high credit score.

RELATED: 7 crucial tips for potential homebuyers:

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Mike Holmes' 7 tips for homebuyers
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Mike Holmes' 7 tips for homebuyers

Take a walk around the house first

"I always take them around the outside of the house first, not through the [front door]. We normally end up going through the back door, the side door but never through the front door -- which is where real estate agents normally take them. You want to make sure that the outside of the home protects the inside. It’s not the inside you’re buying, it’s the house you’re buying."

Photo credit: Getty

Check housing permits before buying

"Real estate agents always claim that houses are newly renovated, new plumbing, new electrical, but there’s never any permits pulled to check -- and that is a big thing. If you didn’t pull your permits that could mean that someone has come in and done a quick facelift or slip."

Photo credit: Getty

Check the age of your home

"The age of the home can tell [you] many different things: whether it has galvanized plumbing, the possibility of asbestos (especially in the plaster), electrical plumbing and then a lot of repetitive things that no one sees. Anything before 1980 has the possibility of lead in the paint -- and that was the year we started to make changes within our building guidelines."

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Different homes have different stories

"For example, if you’re going to buy in Colorado, no one ever has to claim whether or not there was a meth lab or there was a grow lab or somebody was shot in the house. Different areas have different stories and every single home has a different story."

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Never jump at the first home you find

"Buying a home takes an awful lot of legwork, an awful lot of homework and the smartest investors always remember: “It’s the single most expensive investment of your life, so buying smart is buying it right.” Buying by illusion or by emotion can be the worst mistake."

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Always have the right people with you when buying a home

"If you don’t know what you’re looking for in a home other than the paint on the wall, new cabinets, electric and possibly new plumbing, you may want to [contact] someone that you know is a professional in the field. A general contractor, sometimes hiring someone that’s got the best skill, will give you the best payoff because the advice you need is what you don’t know." 

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Bring a rubber ball when going to view potential homes

"Whenever you’re going to look at homes, bring along a nice rubber ball. It’s amazing how a ball can roll in a downward direction. So, always make sure that the grading never runs to the home but away from the home." 

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Lenders are looking to offer mortgages to consumers with high credit scores, and they may be willing to lower your mortgage rate to gain your business if it's high enough. Conversely, if you have a middling or low FICO score, your mortgage rate could be adversely affected. Or worse yet, you may not qualify for a mortgage loan at all.

2. The total loan amount

The total amount of your mortgage loan – and thus to some degree the price of the house you're considering -- can influence your mortgage rate as well. If you take a relatively small loan, say under $100,000, your lender will likely charge you more in order to ensure that it makes a decent profit on such a relatively "small" loan.

Likewise, if you take out a large loan, your lender is liable to charge you more since it's taking on a bigger risk by giving you such a large loan. The jumbo loan limit, as these large loans are referred to, is $417,000 throughout much of the United States. Therefore, if your mortgage loan is under $100,000 or over $417,000, you'll probably pay more than if it was within the sweet spot between these two figures.

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Image source: Mark Moz via Flickr.

3. Your expected down payment

The amount you're willing to put down on a new home can certainly impact what sort of mortgage interest rate you'll pay. Everything comes down to risk, and the less risk your lender has, the more willing they'll be to compromise on your lending rate. As a general rule, if you're willing to put a 20% down payment on a home, you'll usually qualify for a lower mortgage rate.

Understandably, the mortgage rate you'll pay can also vary greatly between lenders, so I'd strongly encourage you to shop around between banks and credit unions in your area, because you may only need to put 5% or 10% down to positively influence your mortgage interest rate.

4. Loan term

The term of your mortgage also influences how much you'll pay. Most lenders incentivize promptness, meaning the shorter your loan term, the lower your mortgage rate will be. A lower mortgage rate is preferable since it means you'd pay less in interest over the life of the loan.

According to Bankrate, as of Nov. 15 the 30-year fixed mortgage rate was 3.88% compared to just 3.07% for the 15-year fixed mortgage. For a $200,000 loan, this 81 basis-point difference translates into a life-of-loan savings of $88,954. Yes, your monthly payment will be almost $450 higher with a 15-year fixed loan, but you'd also save a considerable amount of money.

Mortgage Rate Loan Down Payment Home Cash Getty

Image source: Getty Images.

5. Fixed vs. adjustable

The type of interest rate you choose can also impact your mortgage rate. There are two main types of interest rates: fixed and adjustable. With a fixed rate you know exactly what you're getting. Fixed rates aren't going to move over the life of your loan.

On the other hand, adjustable rate mortgages typically offer a below market rate for a period of three, five, or seven years, then they adjust higher based on LIBOR (the London InterBank Offered Rate). In easier-to-understand terms, if interest rates rise notably during your adjustable teaser rate period, you could face sticker shock once you're exposed to a variable mortgage rate.

6. Loan type

There are also a couple different types of loans you may qualify for that can positively impact your mortgage rate.

What we've discussed above (30-year and 15-year) are conventional mortgage loans where 20% is typically required to be put down by the homebuyer. However, FHA loans (which derive their name from the Federal Housing Administration) often require down payments of as little as 3.5%, and they can offer more attractive interest rates than conventional loans. On the other hand, FHA loans may also require the homeowner to purchase private mortgage insurance, which protects the lender against default should the buyer not make their payment. Different loan types can yield vastly different mortgage rate results.

Images

Image source: Mark Moz via Flickr.

7. Location of your home

It's one of those overlooked factors of the mortgage hunting process, but the location of your home can influence your mortgage rate. Part of this could have to do with the health of the housing market within your state or county. If the housing market is healthy where you're looking, then a lender is less likely to charge a higher rate because it's less worried about the risk of default.

RELATED: The most expensive cities to own a home:

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25 most expensive cities for owning a home

25. Chico-Redding, California

Average monthly payment: $1,261.86

Average loan amount: $221,996.08

(Shutterstock)

24. Portland, Oregon

Average monthly payment: $1,254.57

Average loan amount: $219,193.83

(Jordan Siemens via Getty Images)

23. West Palm Beach, Florida

Average monthly payment: $1,276.05

Average loan amount: $226,421.56

(Gary John Norman via Getty Images)

22. Chicago, Illinois

Average monthly payment: $1,286.55

Average loan amount: $227,387.69

(Izzet Keribar via Getty Images)

21. Miami-Ft. Lauderdale, Florida

Average monthly payment: $1,310.04

Average loan amount: $230,961.95

(Bernhard Lang via Getty Images)

20. Palm Springs, California

Average monthly payment: $1,316.74

Average loan amount: $230,213.80

(moodboard via Getty Images)

19. Reno, Nevada

Average monthly payment: $1,318.76

Average loan amount: $232,477.04

(ddub3429 via Getty Images)

18. Butte-Bozeman, Montana 

Average monthly payment: $1,327.69

Average loan amount: $238,886.17

(AP Photo/Lido Vizzutti)

17. Austin, Texas

Average monthly payment: $1,349.52

Average loan amount: $240,598.30

(Peter Tsai Photography - www.petertsaiphotography.com via Getty Images)

16. Charlottesville, Virginia

Average monthly payment: $1,350.44

Average loan amount: $240,498.60

(Richard Cummins via Getty Images)

15. Salt Lake City, Utah 

Average monthly payment: $1,367.29

Average loan amount: $239,682.58

(Kenneth C. Zirkel via Getty Images)

14. Anchorage, Alaska

Average monthly payment: $1,396.31

Average loan amount: $248,060.82

(Blue Poppy via Getty Images)

13. Bend, Oregon

Average monthly payment: $1,402.07

Average loan amount: $248,563.18

(JamesBrey via Getty Images)

12. Baltimore, Maryland

Average monthly payment: $1,417.49

Average loan amount: $249,982.09

(Walter Bibikow via Getty Images)

11. Seattle-Tacoma, Washington

Average monthly payment: $1,435.30

Average loan amount: $251,546.57

(Sankar Raman via Getty Images)

10. Denver, Colorado

Average monthly payment: $1,446.78

Average loan amount: $255,150.66

(0photoquest7 via Getty Images)

9. Sacramento, California

Average monthly payment: $1,507.10

Average loan amount: $262,301.49

(DenisTangneyJr via Getty Images)

8. Boston, Massachusetts

Average monthly payment: $1,512.51

Average loan amount: $269,947.16

(Jupiterimages via Getty Images)

7. New York, New York

Average monthly payment: $1,647.85

Average loan amount: $294,262.50

(a_Taiga via Getty Images)

6. Washington, DC

Average monthly payment: $1,666.29

Average loan amount: $295,209.97

(Education Images/UIG via Getty Images)

5. Monterey-Salinas, California

Average monthly payment: $1,987.81

Average loan amount: $348,442.84

(Karen Desjardin via Getty Images)

4. Los Angeles, California

Average monthly payment: $2,013.66

Average loan amount: $352,598.46

(Marianna Massey via Getty Images)

3. Honolulu, Hawaii

Average monthly payment: $2,054.95

Average loan amount: $354,883.21

(sorincolac via Getty Images)

2. San Diego, California 

Average monthly payment: $2,234.03

Average loan amount: $398,376.86

(Anna Bryukhanova via Getty Images)

1. San Francisco, California

Average monthly payment: $2,505.42

Average loan amount: $443,999.88

(Matteo Colombo via Getty Images)

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Another component depends on home prices within the area you're looking. Remember, small loans or jumbo loans typically mean a higher mortgage interest rate. This means if you're looking to live near water (i.e., higher-priced areas) or deep in rural America (less expensive homes), the eventual size of your mortgage could fall into that zone where banks are encouraged to charge a higher rate.

8. Monetary policy

Finally, the Federal Reserve's monetary policy can also indirectly influence mortgage rates. The Federal Reserve itself doesn't set mortgage rates. It does, however, control the money supply in America. Increasing the money supply generally pushes the federal funds rate lower, and thus interest rates move lower. Mortgage rates have a tendency to closely follow the 10-year Treasury yield. Tightening the money supply has a tendency to move interest rates higher, and thus mortgage rates higher.

In recent Federal Open Market Committee meetings, the regulatory body has strongly hinted at tightening monetary policy, which would signal that mortgage rates could head higher very soon.

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