Time and time again we get this question from some of our clients. “I read in the papers that the average rate for mortgages is _____%. Yet I am being quoted a higher rate than average. Why am I being asked to pay more?”

This is a very good question and one that deserves more than a cryptic answer. After all, your home is the most important investment and typically your largest payment. The rate you are charged directly affects that payment.

First, you must understand that the averages reported by major information sources such as Freddie Mac and BankRate.com will be based upon averages of those who have certain “personal” and “transactional” characteristics or variables. Each of these variables may affect the rate you will be asked to pay. In this report, we will explain many of these variables that can affect the rate and thus the payment of a home loan. It should also be noted that if you are paying mortgage insurance because of a down payment of less than 20% on a conventional loan, these variables will not only increase the rate on the home loan, but the cost of this insurance as well.

Personal Variables:

Credit Score. The most widely recognized and most important of all variables is tied to your credit score. Most applicants now understand that a poor credit record can affect the rate they pay. The higher the score the better and you may need a score of 720 or more in order to procure the lowest rate quote.

What can cause your score to be lower? Late payments, significant blemishes such as judgments or bankruptcies, too much credit or not enough credit and more. It is important to note that a low score does not only affect your mortgage rate, but can also affect your rate on credit cards, other loans and even insurance rates. Here is the good news: by working with someone knowledgeable such as your loan officer, you can raise your score and lower your quote.

Too many debts. If you are carrying too many debts, you may not only have a lower credit score, but also a high debt- to-income (DTI) ratio. This high ratio may result in not being qualified for all loan programs. When choices are restricted, the choices that remain may result in a higher rate.

Not enough income. In the past, no-income verification programs solved the problem for many who had income, but could not document that income for lenders. The financial crisis has caused most of these programs to go away and again limits choices to those which may allow higher debt-to-income ratios. More recently, there are bank-statement loan which allow income verification through bank statements. These programs would usually be available with higher rates and larger down payments.

Transactional Variables:

Primary Residence. Most mortgage interest rate surveys or advertisements are quoting the rate on a primary residence, which means you live in the property. If you are purchasing or refinancing a property you are renting out as an investment, the rate is going to be higher and there will be other underwriting restrictions such as a requirement for a larger down-payment. Second or vacation homes are often not rented out and may be quoted the rate same as primary residences, but that is not always the case. For example, more recently the conforming agencies (Fannie Mae and Freddie Mac) have added loan-level price adjustments for second homes.

Down-payment or equity. If you are putting the minimum down or you have little equity in the home when refinancing, you are likely to be asked to pay mortgage insurance which protects the lender against default. This raises the cost of the mortgage. Some programs will charge a rate premium as well as mortgage insurance. Though an extra cost, the availability of mortgage insurance enables lower down payment mortgages to be offerred by lenders.

Large Loan Amounts. If you are looking for a large mortgage which exceeds the conforming (Fannie Mae or Freddie Mac) or FHA  loan amounts, then you may be asked to pay a higher rate. The secondary markets are not as efficient for jumbo mortgages as the government does not directly support this segment of the markets. On the other hand, there are times in which jumbo loan rates are lower than conforming because of financial institutions purchasing loans for their portolios, which means they are not sold on the secondary markets. These portfolio lenders may add additional underwriting restrictions.

Type of property. Many property types may result in a higher interest rate. One of the most common is condominiums, especially those that don’t have approval from the agencies specified in the previous paragraph. What would cause a condo project not to be approved? Perhaps there is a high percentage of investors owning units or a high percentage of owners behind on paying association dues. Other property types that may include premiums on rate could include duplexes, rural properties, properties with combined commercial usage and other unusual properties.

Early in 2023, Fannie Mae and Freddie Mac updated their “Loan-Level Price Adjustments” for credit scores, loan-to-values and even debt-to-income ratios.  Some categories were lowered and others increased.  Generally the same variables apply–but the final rate a borrower is charged may be different.

This list should not be considered exhaustive as there are other situations that may affect your rate. However, this list does demonstrate the importance of meeting with your loan officer BEFORE you purchase a home so that you can make a more informed decision.