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Like death and taxes, mortgage rates seem to be one of those unavoidable pains in life. Most people looking for a mortgage want the lowest rate possible, but many don’t understand what determines a mortgage rate in the first place. Since your bank or mortgage broker knows how your rate will be determined, it’s best if you do to. Understanding how mortgage rates are set and what the norms are will help you negotiate your rate and make it easier for you to shop around. While the fluctuation of mortgage rates is both constant and out of your control, understanding the basics about why they change, how they’re set, and what an average mortgage rate looks like will equip with valuable knowledge and negotiating tools.

Your Credit Score

As with most types of loans, your credit score plays a big role in determining your mortgage rate. Generally speaking, higher credit scores lead to lower mortgage rates. As far as your loaner is concerned, your credit score reflects how reliable you will be in making payments. It’s always a good idea to check your credit score before negotiating a loan. It’s not uncommon for errors to be made in credit scores, so checking beforehand gives you time to make sure your credit score is correct. This will give you a better chance of securing a low mortgage rate.

Price of the Home, Amount of Loan and Down Payment

Basically, the loan amount on your mortgage is the cost of the home, plus your closing costs, minus the down payment. Interest rates tend to be higher on especially large or small loans, so it’s important to consider how much debt you’re willing to incur. People often have a hard time staying within their budget when shopping for a home, but it’s important to remember the long term costs of a high interest rate and mortgage. Not surprisingly, the larger down payment you can make, the lower your required loan, and the lower your mortgage rate. Similar to your credit score, a higher down payment demonstrates lower risk and higher trust to banks and mortgage brokers.

Location of the Home

Sometimes the location of your home can affect your mortgage rate. It’s always good to ask your broker or bank about rural versus urban mortgage rates, and worth considering when choosing a home.

Type and Term of Loan

As with any loan, the loan term can play a big role in interest rates. Shorter loan terms will have higher monthly payments but lower interest rates, whereas long term loans will have lower monthly payments with higher interest rates. The type of loan is also a major determining factor, and there are numerous different types of loans. Always ask your bank or broker about the different types of loans available to you, and how each one might affect your mortgage rate.

Type of Interest Rate

Finally, the type of interest rate you chose will also make a difference to your mortgage rate. The two main types of interest rates are fixed and variable. A fixed mortgage rate is more straightforward, and lower risk if rates skyrocket during your repayment. Alternatively, if rates are particularly high when you sign up for a mortgage, you might be more inclined to choose a variable rate and hope they go down.

You don’t need to be an expert on markets or mortgage rates to equip yourself with valuable knowledge about your mortgage rate. Understanding what factors are involved in setting your rate and being able to discuss these factors with your lender will help you get the best mortgage rate for your needs.