Interest Rate

How Mortgage Interest Rates Work

The interest rate is expressed as an annual percentage applied to the remaining principal balance. For a fixed-rate mortgage, this rate stays the same for the entire term. For an adjustable-rate mortgage, the rate is fixed for an initial period and then recalculates periodically based on a market index plus a lender margin. Interest accrues daily or monthly depending on the loan terms, and the monthly interest charge equals the annual rate divided by 12, multiplied by the current outstanding balance.

Factors That Determine Your Rate

Mortgage interest rates are influenced by both market conditions and borrower-specific factors:

• Federal funds rate and bond markets: broad economic conditions set the baseline for mortgage rates
• Credit score: borrowers with higher scores (typically ) receive the best available rates
• Loan-to-value ratio: lower LTV (higher down payment) generally results in better pricing
• Loan type and term: 15-year fixed rates are typically lower than 30-year fixed rates; conforming loans price better than jumbo or non-QM products
• Property type and occupancy: primary residences receive better rates than investment properties or second homes
• Discount points: borrowers can pay upfront fees to reduce the rate, typically per point

Rate vs. APR

The interest rate determines the monthly payment, but the Annual Percentage Rate (APR) is the more complete measure of borrowing cost. The APR includes the interest rate plus lender fees, points, and certain other charges. When comparing loan offers, borrowers should evaluate both the rate (for payment planning) and the APR (for total cost comparison). The rate is always equal to or lower than the APR.