# Information on determination of mortgage interest rates

Bills.com Team
UpdatedApr 21, 2015

## How do mortgage companies determine your interest rate?

How do mortgage companies determine your interest rate?

Many factors that are considered when determining the rate you're receiving on a mortgage. I will discuss three main factors that affect the rate that you receive.

### 2. Loan to Value (LTV) Ratio:

The loan-to-value (LTV) ratio is the amount of a mortgage as a percentage of the total appraised value of the property. For instance, if a borrower wants \$80,000 to purchase a house worth \$120,000, the LTV ratio is \$80,000/\$120,000 or 66.66%. Loan to value is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss in the foreclosure process increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect the lender from the buyer default, which increases the costs of the mortgage. A larger down payment (greater than 20%) will give you the best possible rate. Down payments of 5% or less should expect to pay a higher rate as you are starting with less equity as collateral.

### 3. Debt to Income (DTI) Ratio:

Debt to Income (DTI) is a variable that lenders use to see your ability to make payments on your loan - it literally means the percent of your income that will be used to make your debt payments. A Debt to Income Ratio is a calculation used to determine if the income of a potential borrower qualifies for a mortgage loan. The way to calculate your own Debt to Income Ratio is to take all of your monthly debt payments (minimum credit card payments, car payments, student loan payments, current and/or proposed mortgage payments including taxes and insurance) and divide that number by your monthly income. For example, if the total of your credit card payments, student loan payments and mortgage payment equals \$4,500, and you make \$10,000 a month, then your Debt to Income ratio is 45%. If you have a high DTI expect to pay more on your interest rate.

There are several other factors used in determining your mortgage rates and each application for a mortgage is unique by itself. For more information on mortgages, please visit the mortgage information page on our website.

I hope the information provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com