 TITLE: What to Know About How Mortgage Interest Works CONTENT: How Is Your Mortgage Interest Rate Determined?\n----------------------------------------------\nWhen you're approved for a mortgage, the loan's interest rate will be based on the risk you pose as a borrower as well as factors related to your home, the loan and economic conditions. Because mortgage loans have long repayment terms—the most common options are 15 and 30 years—even a small change in your rate can make a difference of thousands of dollars in interest charges.\nHere are some of the most significant factors that lenders review to decide your loan's interest rate:\n*   **Current market rates**: Mortgage rates are constantly changing, and vary based on more than the individual circumstances of each loan. The lender, where you live and the state of the lending market all make a difference. Whatever the prevailing market rates are at the time you apply will essentially provide a range of rates that you may get based on all other factors.\n*   **How much you borrow**: The more money you borrow, the more of a risk you pose to the lender. As such, buying a less-expensive house or making a larger down payment could potentially help reduce your interest rate. Even if it doesn't, it'll save you money on interest because you'll have a smaller loan.\n*   **Your loan term**: In general, shorter loan terms across all loan types result in a lower interest rate. Again, the reason is that the longer you have to pay off a loan, the more of a risk of default you pose to the lender. If you can afford a 15-year mortgage, you'll score a lower interest rate than if you opted for a comparable 30-year loan.\n*   **Credit and income**: The higher your credit score, the likelier your chances are of qualifying for a lower interest rate. Also, lenders will review your income and debt situation to calculate your debt-to-income ratio (DTI). If you have a low ratio—that is to say, the percentage of your income that goes toward monthly debt payments is low—it could result in a lower rate.\n*   **Interest rate type**: Mortgage lenders often offer two types of interest rates: fixed and adjustable. With a fixed-rate mortgage, your rate remains the same for the life of the loan, and it generally starts higher than an adjustable rate. With the latter, your interest rate remains fixed for a set period. Once that period is over, it turns into a variable rate that can fluctuate with market rates. Adjustable rates typically start off lower but can ultimately cost you more if market rates climb higher than the fixed-rate alternative.\n*   **Closing costs**: In some cases, you may be able to have the lender pay your closing costs in exchange for a slightly higher interest rate. Also, lenders typically allow you to pay \"mortgage points\" as part of your closing costs. Mortgage points allow you to effectively buy a lower interest rate by paying more money upfront.\nWith this information in mind, you may be able to gain a little more control over what your interest rate will be on a mortgage loan. For example, having enough cash to make a large down payment and pay points at closing can help you score a lower interest rate. Also, maintaining a high credit score and paying down other debts can have the same effect. END