Most people are not concerned about the mortgage market until they want to buy a home. To those unfamiliar with the mortgage market, they think mortgage rates are determined through mysticism, not understandable by mere mortals. However, our goal here is to help you comprehend how mortgage rates are determined and the factors affecting their variations. Mortgage rates are set by a combination of personal factors like your credit score and market factors like general economic condition. Mortgage rates are often advertised on media or at real estate offices; you can view mortgage rates sheets. When looking for a mortgage lender, you can compare the advertised rates, but they are unlikely to be true. This is because everybody has a mortgage rate unique to them. To determine what rates you qualify for, you will need to get personalized quotes from different lenders and compare them. It is also wise to look at online reviews of different lenders. From the reviews, you’ll be able to identify customer mortgage companies complaints. Avoid companies with negative reviews. Go for mortgage lenders with standard rate mortgages.
The following factors will determine mortgage fluctuations.
- Federal Reserve
The federal funds rate is when institutions charge each other for short-term loans and affect bank’s interest rates. That rate will finally trickle down into other short-term lending rates. The Fed impacts these rates through buying and selling of previously issued U.S securities. If the government buys more securities, interest rates decrease because banks have been injected with more money than they can lend. When the government sells more securities, the interest rate will rise because banks would have been drained money for transactions.
Inflation is the gradual increase of the prices of goods and services, and it is an essential point of reference when measuring economic growth. Inflation reduces consumers’ purchasing power, and lenders consider that when setting mortgage rates. Lenders have to adjust mortgage rates to catch up with the deteriorating consumers’ purchasing power if inflation rises too quickly. At the end of the business, lenders still want profit, which becomes difficult with diminishing consumers’ purchasing power.
- Your financial status and credit score
Lenders usually assess your risk of default to ensure that you can repay your mortgage loan. They do a thorough evaluation of your credit score and your debt-to-income (DTI) ratio. This is the ratio between your total monthly debts and your monthly gross income. A high debt-to-income ratio makes your interest rates high because you appear riskier to the lender.
Your credit score is another determinant that you will manage your debt and pay bills on time. Lenders set higher interest rates for borrowers with lower credit scores and give them limited loan options. Borrowers with higher credit scores enjoy lower interest rates. Lenders rely on your credit score to determine your reliability in repaying the loan. Your credit score is gauged from your credit histories, such as your credit cards, previous loans, and repayment history. When seeking a mortgage, first check your credit, review your credit reports, and solve them with the credit reporting company if any errors. An error on your credit report can adversely affect your credit score and disqualify you from getting better loan rates and terms.
- Your home location, price, and loan amount.
You will get different rates from lenders based on the state you live in. Borrowers who want to purchase a home in rural areas will have their interest rates different from those who want to purchase in urban areas. But you will need to shop around because different lenders have different loan products and rates.
The amount you need to borrow is determined by home price, closing costs, and your down payments. Depending on the type of loan, your mortgage insurance and closing costs may be included in the amount of your mortgage loan. Different home prices will qualify for different types of loans with different interest rates.
- Economic conditions
Good and bad economic conditions have the opposite effect on mortgage rates. Good economic conditions encourage consumers to spend more, and positive GDP growth pushes mortgage rates higher. This is because increased demand means more work to lenders and more workforce to process the loans.
Bad economic conditions discourage investors, and they divert towards safe investments like treasury bonds. This lowers mortgage interest rates.
- Loan term and down payment
The loan duration of your loan determines the interest rate. Short-term loans will have lower overall costs and lower interest rates, but the monthly rates will be higher. Also, if you pay a larger down payment, the interest rate will be lower too because lenders will see lower risk.
Since interest rates are a significant factor in the amount you will pay for borrowing a mortgage loan, it is important to understand how the interest rates change.