the arbor edge

A home mortgage is the single biggest purchase that most people will make in their lifetime. Yet, most people put more effort into pricing a flat screen TV than shopping for a mortgage. One of the reasons is the sheer complexity of something as small as the mortgage interest rate. There are so many factors that determine your interest rate, that it can be hard for the average consumer to know where to start when mortgage shopping. We’re going to break down what goes into determining your interest rate and how you can use that knowledge to shop for the best mortgage.


1. Know what factors determine an interest rate:

Credit Score

The first thing any lender looks at is your credit scores. Most mortgage lenders pull a tri-merge credit report. This is a credit report that shows all 3 major credit bureau scores. Lenders use the middle of those three scores to determine your qualifications. The higher the credit score, the lower the interest rate. To qualify for conventional or government loan programs, you’ll want to have greater than a 620 middle score. FHA pricing doesn’t vary much by score, but conventional loan pricing can vary wildly. For the very best rates, you’ll want to have a 740 middle score or better. To find out where you stand, start with getting your own free credit report at www.annualcreditreport.com. This report won’t give you the scores, though. For that, www.myfico.com has the closest model to the report mortgage lenders pull.



Loan Size

Is your loan amount under $100,000 or over $417,000? Expect to be charged slightly higher rates in these cases.

Loan to Value or LTV

Your loan to value is the ratio of your loan amount to the value of your home. If you are borrowing 80% of your home’s value or less, then the best conventional interest rates should be available to you. The higher you get above 80%, the worse your interest rate will get. For government financing, loan to value does not affect interest rate. So, if your loan to value is over 80% and you don’t like the interest rate offered, ask to see the price on an FHA or other government loan. It may be better.

Loan purpose

If you are taking cash out on your refinance, there will be a penalty to the interest rate for that. Purchase loans and rate and term refinances won’t see a change.

Rate lock period

The shorter you are able to lock your interest rate, the better the rate. Be careful, though, that you don’t ask for too short of a lock period. If you have to extend the lock, it could end up costing you more than if you just chose the longer lock to begin with.


2. Know what loan program and loan purpose you are being quoted and only compare like programs.

Don’t compare a FHA cash out refinance to a conventional rate and term refinance. Interest rates and closing costs will vary wildly between the two products and you’ll never know which lender actually had the better deal. Only compare when the loan program and purpose are exactly the same.

3. Ask for good faith or initial fee estimates on the same day.

Interest rates change daily, so if you look at fee estimates from differing days you won’t be able to guarantee which is the best. Unless a rate is locked, it is only good on the day it’s quoted. Don’t compare last week’s quote to todays, because last week’s may not even be available any longer.

4. When comparing offers, compare origination charges (including all processing, underwriting, lender, administration and commitment fees), discount points and interest rates.

These are the only items that the lender controls. Third party charges like credit report, appraisal fees, title fees, and flood certifications are not set by the lender and should be similar with all lenders. Pre paid items such as escrow start up and prepaid interest are also not set by the lender and shouldn’t vary.


When taking all of the above into account, you may have an edge on finding the lowest interest rate. Don’t confuse lowest interest rate with best deal, though. There are many other things to consider when shopping for a mortgage, like customer service and expertise. Did your loan officer return your calls promptly? Explain everything thoroughly? Sound knowledgeable about their products? If the answer is “no” to any of those questions, you may find yourself with other obstacles in your home loan process that make closing difficult. Take a look at the entire picture when shopping; interest rate, closing costs, customer service and expertise. This will ensure you don’t just get the lowest price, but the easiest closing as well.