Mortgage Interest Rates 101
Many things affect mortgage rates -
which is why they fluctuate. So it pays to understand a little
about how mortgage interest rates are generated. The more you
know about the economic factors that change rates, the more
prepared you are to find the perfect home loan at an interest
rate that's perfect for you as well.
Market Conditions
When the Federal
Reserve Board raises or lowers rates, there is usually an
impact on the rate you will get for your fixed rate home loan,
although it's not as direct as it may seem. The Federal
Reserve adjusts federal funds rate, which is the rate at which
banks lend to each other. When federal funds rate decrease, we
spend more, which can actually increase inflation. Mortgage
rates tend to be longer-term rates that are affected by
concerns about inflation, as well as other economic indicators
like job growth. So it's more accurate to say that mortgage
rates are indirectly affected by the Federal Reserve Board,
and more directly affected by what happens every day in active
public markets. The market sets the interest rate, and then a
margin is added to the index to determine your final mortgage
interest rate.
Timing
Since interest rates change daily, the
longer a lender locks in a rate, the higher the risk that the
market will move against them. Therefore, you pay more (in
points) for a longer guarantee. If interest rates appear to be
on an upswing, it makes sense to lock in your rate. If they
are steadily dropping, it makes sense to float your interest
rate so that you can take advantage of a shorter lock-in
period, saving you money.
Points
You can often receive a lower mortgage
interest rate by paying extra points - mortgage costs that are
up-front rather than built into the interest rate. Each point
equals one percentage point of the total amount of the loan.
For example, one point on a $100,000 loan is the equivalent of
paying $1,000 to ensure you get a lower interest rate that
saves you money over the life of your loan.
Credit and Payment History
A less-than-perfect track record may make
you seem like a high credit risk, which means you'd only be
eligible for higher mortgage interest rate loans. If you find
yourself in this position we may still be able to help you.
Debt-To-Income
Ratio
Your monthly debt obligations are
calculated against your current income. The higher the ratio,
the higher the risk which could mean a higher interest
rate.
Loan-to-Value
The loan-to-value is the amount you need
to borrow versus the value of the home you want to buy. The
more equity you have or the more money you give as a down
payment decreases a lender's risk, often resulting in a lower
rate for you.
Property Type
Lender risk plays a big part in your
rate. For instance, a loan for a single-family home is less
risky than one for a multi-family home because there are fewer
variables. The less risk, the better the rate.
Occupancy
If you plan on living in your new home,
you will probably get a better rate versus a loan on a rental
unit, which carries more risk for the lender.
Loan Amount
The amount of money
you borrow could affect the interest rate you get.
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