Does the Interest Rate Affect a Mortgage?


The price you pay for a house isn't the only thing that factors into the loan payment. Every mortgage has an interest rate attached to the loan, and buyers pay interest over the life of the home loan. Because the rate affects the home loan payment, borrowers are typically interested in ways to acquire the best rate.

House Payment

Because mortgage lenders roll the monthly interest into the house payment, acquiring the lowest mortgage payment possible involves getting approved for the lowest interest rate. Borrowers who qualify for the best mortgage rate can usually spend more on a home loan, whereas a high mortgage rate can reduce buying power. For example, according to BankRate, a $200,000 mortgage loan with a 30-year term and 7 percent interest rate has a payment of $1,330.60 (before taxes and insurance). The same mortgage loan with a 4 percent interest rate has a payment of $954.83 — a difference of nearly $400.

Interest and Credit

Keeping the payment on a house low starts with watching your credit score and credit history. Even before approving your home loan application, lenders conduct a thorough check of your credit history. They check past credit patterns (payment history and debts) to see if you're eligible for a mortgage; if you qualify, they base the mortgage interest rate on your credit score. Typically, the higher your credit score, the better your chances of securing the best mortgage rate. Credit scores can climb as high as 850, and scores in the 700 range open the door to the most favorable terms.

Lowering the Mortgage Rate

Options are available to help ensure you receive the best mortgage rate possible, and a home loan that's affordable. Fixed-rate mortgages offer stability and predictable payments. But if you only plan on living in your house for a few years, an adjustable rate mortgage typically offers lower rates, and saves you money on interest and the mortgage payment. Another option is purchasing mortgage points to buy down the rate on your loan. Pay one point for a .25 rate reduction (or four points to reduce your rate by a full percentage point). Every discount point will cost 1 percent of the mortgage balance.

Rate Shopping

Rate shopping involves requesting mortgage quotes from different lenders or mortgage companies to compare terms. This method is somewhat time consuming, but because lenders use different guidelines to determine mortgage rates, comparison shopping can help you acquire a cheap mortgage rate, and subsequently a lower monthly mortgage payment.

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