Two key factors in securing a low mortgage rate
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By Scott Sheldon  January 10, 2014 12:00 am

It’s not surprising interest rates are on the rise as the Fed has committed to reducing its mortgage bond buying starting this month. There is an array of factors affecting a mortgage rate, including home occupancy, loan type and even property type. Two factors carry the most weight when shopping mortgages.

How lender sees the risk

A mortgage lender will price or quote a rate determined by risk-based pricing. In other words, the pricier the loan, the more the inherent risk lender assumes in originating that loan.

Lenders look at consumer and property profiles to determine how that loan will be priced.

A consumer profile includes such things as debt ratio, credit score, occupancy, property type and loan type.

Property profiles include everything about the property, such as loans or encumbrances (interests of other parties on title). Also included in this assessment is whether the property is a single-family residence, condominium etc. These factors affect the pricing of that loan and subsequent interest rate.

To obtain the most favorable mortgage rate scenario, a consumer ought to have a high credit score and a low loan-to-value.

For example, consider this illustration of two mortgage-rate scenarios – both seeking to refinance their home (by the way, whether refinancing or purchasing – the sole purpose of either does not change rate/terms).

• Consumer A: Seeking to refinance a single-family residence with a credit score of 760 and equity of 20 percent representing an 80 percent loan-to-value transaction.


• Consumer B: Identical scenario except for the fact their home equity is 30 percent representing a 70 percent loan-to-value.

Consumer B obtains the lower interest rate.

Why? They have more equity-less risk for the lender, despite having the same credit score as other consumer.

The credit score works the same way. In other words, if both homeowners had 30 percent equity and one had a credit score of 720 while the other had a credit score of 760, the consumer with the 760 credit score would come out on top to the degree of approximately .25-.625 percent lower interest rate, which again is less risky for the lender.


Beware of adjusters when 

shopping mortgage rates

Factors that drive rates include the jobs report at the first Friday of each month. The better the job data, the more propensity for rates to hold or rise. Conversely, the worse the jobs, the more likely there’ll be rate improvement (rates edging downward). Additionally, when the Federal Reserve meets to discuss monetary policy, their words and the market’s perception on those words drive the markets considerably.

While economic conditions are always a factor, the lender usually has their finger on the pulse of such developments and could always advise you on when the best time is to take advantage of a particular day’s mortgage rate pricing.

Rates are also indicative of loan type, such as FHA or conventional for example. Usually, FHA loans offer better rates and pricing than conventional. However, it may make sense for a consumer to improve their credit score for a better interest rate on their loan if they don’t have the ability to increase their equity and/or reduce their loan-to-value.

Such is true on a conventional mortgage loan that is a non-government loan. A borrower would most benefit by increasing their credit score, as conventional loans directly price in relationship to credit score and loan-to-value.

If the consumer is looking at an FHA loan, pricing is more factored on the overall loan scenario than specifically on credit score and loan-to-value, so long as a borrower has a credit score of 620 and at least 3.5 percent equity.


Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at

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