Mortgage Rates 101: Why the Best Deal Isn't Always the Lowest Rate
“Interest rates are just one piece of the puzzle. The real opportunity lies in finding the right property at the right price and making smart financial decisions that will benefit you in the long run.” - Tom Ferry
When it comes to buying a home, refinancing, or investing in property, one of the first things everyone asks is: "What's the rate?" And I get it—no one wants to pay more than they have to, but focusing only on interest rates could be costing you more than you realize.
Let’s dive into how mortgage rates work, the factors that influence them, and why that shiny low rate you see advertised might not always be the best deal for you.
Date the Rate, Marry the Price
The idea here is simple: rates change, but your home or investment is what sticks. So, think of your mortgage rate as something you're just "dating." It’s not forever, and in the future, you can always refinance if rates drop. However, the price you pay for your home? That's what you’re "marrying." It’s a long-term commitment.
So, while a lower rate is always appealing, it’s just one part of the bigger picture. What you should focus on is securing the right home or investment at the best price. Rates can fluctuate, and refinancing is always an option, but locking in the right property is key.
What Determines Your Mortgage Interest Rate?
While those low rates on billboards may catch your eye, you need to know the actual factors that influence the rate you’ll be offered:
Credit Score
This is the big one. Your credit score directly impacts the rate you get. The higher your score, the better your rate. Lenders see a higher credit score as less risk, so they’re willing to offer you more competitive rates. If your credit needs some work, don't worry—there are ways to improve it. Start by checking your score and addressing any issues you see.Loan-to-Value Ratio (LTV)
LTV is the amount you’re borrowing compared to the value of the property. If you're putting down a small down payment (say 3-5%), you’ll have a higher LTV, which can result in a higher rate. A larger down payment means a lower LTV, which is seen as less risk for lenders, often resulting in a better rate.Debt-to-Income Ratio (DTI)
Lenders want to know that you can afford your mortgage on top of your other financial responsibilities. A high DTI (more debt compared to income) can raise your rate or even hurt your chances of getting approved. Aim to keep your debts low and your income stable when you're applying.Loan Type and Term
Different loan types (FHA, VA, Conventional, etc.) offer different rates, and the term length matters, too. A 15-year mortgage usually has a lower rate than a 30-year mortgage, but the monthly payments are higher. Pick what’s best for your situation.
Beware of the “Lowest Rate” Trap
You’ve probably seen ads screaming about the "lowest rates in town," but here's the catch: that low rate almost always comes with hidden costs. Many lenders charge points to buy down your rate. Essentially, you’re paying more upfront to get a lower rate over time, and in some cases, that’s not a smart move.
Make sure you’re asking about the total cost of the loan, not just the rate. What are the closing costs? Are there points involved? Is the lower rate worth the upfront fees? A slightly higher rate with fewer fees could actually be the better deal in the long run.
Rates Aren't Forever – Refinancing is Always an Option
Here’s the thing about mortgage rates—they change. What’s high today might be low tomorrow, and you always have the option to refinance later if it makes sense. That’s why focusing on getting the right house or investment now is crucial. You can always date a new rate in the future when the market swings in your favor.
Understanding the Big Picture
Whether you're a first-time homebuyer, looking to refinance, or an investor growing your portfolio, it's important to understand that the rate isn't everything. Yes, it matters, but it shouldn’t be the only thing you consider.
Focus on the big picture—your budget, the price of the property, and the long-term investment. Be aware of the factors that go into your rate, and don’t fall for the lowest rate without understanding the full cost.
So, date that rate, but always marry the price.
Chantelle Davis is a Mortgage Strategist who helps homebuyers, investors, and those refinancing to navigate the mortgage process with ease and confidence. Need help with your mortgage strategy? Let’s chat and find the best solution for you.