Nicole Rueth, Producing Branch Manager for The Rueth Team - Fairway Independent Mortgage Corporation
When in the process of purchasing a home – do you know what gets factored into determining your mortgage rate? The interest rate is one piece of the overall financial mortgage solution. Since mortgage rates can impact the long-term cost of purchasing a home, it’s important to understand why they can adjust.
While mortgage borrowers, of course, seek the lowest possible rates, mortgage lenders have to manage their risk through the interest rates charged. There are many external and personal factors that affect your individual mortgage. Though there are several factors you can’t change, it’s still good to know where these rates come from in order to have a better understanding as you begin the home-buying process. Here are some of the key items that factor into your mortgage rate.
The Federal Reserve Monetary Policy: The Federal Reserve does not set the specific interest rates in the mortgage market. However, its actions in establishing the Federal Funds rate and adjusting the money supply upward or downward have a significant impact on the interest rates available to the borrowing public. Generally, increases in the money supply put downward pressure on rates, while tightening the money supply drives rates up.
Housing Market Trends: Trends and conditions in the housing market also affect mortgage rates. When fewer homes are being built or offered for resale, the decline in home purchasing can lead to a decline in the demand for mortgages, bringing interest rates down. There is also an increasing number of consumers opting to rent, contributing to the downward pressure on rates.
The Overall Economy: Interest rates influence economic behavior as well. In a low interest rate environment, businesses are eager to borrow, make capital expenditures, expand their businesses and hire more employees. Personal wealth rises and encourages even more spending. The housing market booms during periods of low mortgage rates. As interest rates rise, the cost for such expansion becomes ever more expensive – businesses become more cautious, discontinue plans for expansion and often begin laying people off. As a result of these mortgage raises, housing construction weakens and home sales typically become sluggish.
Credit Scores: Making sure you have your credit in the best possible condition before securing a mortgage will go a long way in your favor. As a rule, people with higher credit scores have lower mortgage interest rates and vice versa. Lenders use credit scores to predict how reliable you’ll be in paying your loan. Credit scores are calculated based on the information in your credit report, including, your payment history, balances, available credit, and mix of credit (including credit cards, installment loans, and mortgages). We have a free credit optimization service for our clients if you feel your credit score has room to improve.
Loan Amount and Down Payment: The amount you put down and your purchase price can impact your interest rate. Loan to Value is a factor of the loan amount divided into the purchase price. Putting less than 20% down can actually give you a better interest rate, but also usually includes mortgage insurance. Putting more than 25% down will also give your interest rate a boost in the right direction.
Loan Term: Just as a larger down payment can decrease your rate, so can picking a shorter loan term or duration. In general, shorter term loans have lower interest rates and lower overall costs as you’re not accumulating more over an extended period of time.
Interest Rate Type: Home interest rates come in two types – fixed and adjustable. Fixed rates don’t change, whereas adjustable rates do fluctuate each period based on the market. Though the initial rate may be lower with an adjustable-rate loan, that rate might increase significantly later on. Make your decision about the type of loan based on how quickly you intend to pay off your loan.
Loan Type: Different loan products will carry different interest rates based on being insured or guaranteed by government agencies. USDA, VA, and FHA loans typically carry the lowest interest rates. Conventional and Jumbo loans will have slightly higher interest rates but when paired with higher credit scores offer significant advantages.
Like many economic trends, mortgage rates are a game of supply and demand. Factors such as economic growth, the Federal Reserve's monetary policy and overall market trends can largely impact what mortgage rates look like, and most of these factors we cannot individually control. However, your financial health will also affect the interest rate you receive, so do your best to make that as healthy as possible!
The Rueth Team is here to help you better understand what you can do to get the best mortgage rate possible today. Give us a call!