Mortgage rates are rising again.  As mortgage rates increase the price of houses will begin to decrease.   But, what is an mortgage rate and how does it work? 

Essentially, a mortgage rate is the amount percentage rate the lender is charging you on a monthly basis to borrow the money to buy your home.  Mortgage rates are determined by several different factors; those that are out of your control (inflation, stock market, federal reserve, etc..), and the factors that are in your control.  It is the factors that are in your control that we want to look at.

1.) credit score: your credit score will have a significant impact on the mortgage rate you will be able to get from a lender.  Raising your credit score is one of the surest ways to lower your mortgage rate when you are buying a home.

2.) Loan to value: This is a way of saying the amount of downpayment you will make on your new home when you are at the settlement.  A downpayment is the amount of money you will pay at the beginning of the loan to try to lower the amount you are borrowing.  So for an example, let's pretend you are buying a home that costs $200,000, and you have a loan to value ratio of 95%.  This means that 95% of the cost of the home is going to be borrowed from the lender.  The day of settlement on your home you will pay a 5% or $10,000 down payment.  The lower your loan to value ratio is, and the more your down payment, the lower your mortgage rate will go.  Home buyers with a large downpayment are seen as less risky to lenders; therefore, will usually be given a lower rate. Home buyers with a smaller downpayment are seen as more risky to lenders; therefore, will usually be given a higher rate.

There is one more part of this that can be a little difficult to understand.  When you go to a lender and you receive a pre-approval letter there will probably be the letters APR with a percentage beside it.  APR stands for Annual Percentage Rate.  It reflects the entire percentage rate you will pay for your mortgage. It will include your mortgage rate, lender fees (not paid at settlement), and points* it is usually higher than just the mortgage rate itself, and is a much more accurate picture of the rate you will pay.

*POINTS-some lenders will decrease your rate, or "give points" if you pay certain lender fees upfront, thus bringing down your APR. If the lender allows you to bundle those fees or costs into the loan your APR will go up.