What affects your interest rate?

Your interest rate will be influenced by some factors that are based on your particular situation and choice of loan, such as your credit score, the term of the loan and the loan program.
Overall, interest rates are mainly impacted by the movement of money in and out of Mortgage Backed Securities (MBS). Other factors that affect interest rates include:

  • Inflation
  • The Federal Reserve
  • Unemployment
  • GDP (Gross Domestic Product)
  • Global political events and natural disasters

Interest rate and payments

As an example, let’s say the interest rate is 4.5% on a fixed rate loan with a principal balance of $350,000 on the loan. To calculate the monthly payment you would divide 4.5% by 12 months to get the monthly percentage rate. The answer, .375 in this case, is the percent of interest paid each month on the principal balance. So for the first month’s payment, the interest paid would be $1312.50, the principal plus any additional costs (mortgage insurance, homeowners insurance, etc) would then be added in to calculate the payment.


After each payment the principal balance drops, which lowers the amount of interest charged. So why doesn’t the payment go down? That’s where loan amortization comes into play. Though the payment is the same, in an amortized, fixed rate loan there is more principal and less interest in each payment throughout the life of the loan.

What is the difference between interest rate and APR?

The interest rate is the percentage used to calculate your monthly payment. The annual percentage rate, or APR, is the total cost of the loan expressed as a percentage. The total cost of the loan includes the interest, origination fees, “points” and other costs, thereby giving the effective percentage rate if those costs were added into the interest rate. The APR does not affect your monthly payments, it is typically used as a tool to compare the total cost of loans that have the same or very close interest rates but differences in fees.