Understanding Mortgage Rates Today
Many things affect mortgage rates, causing them to fluctuate, so it pays to understand how mortgage interest rates are generated. With a basic mortgage education, you'll know the economic factors that change mortgage rates today. This information will prepare you find the perfect home purchase loan with ideal interest rates.
Market Conditions
When the Federal Reserve Board raises or lowers interest rates, this usually impacts the rate of your fixed rate home mortgage, although it's not as direct as it may seem. The Federal Reserve adjusts the "federal funds rate," the rate at which banks lend to each other. When the federal funds rate decreases, we spend more, which can actually increase inflation.
Interest 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 today are indirectly affected by the Federal Reserve Board, and more directly affected by what happens every day in active public markets. The market sets interest rates, and then a margin is added to the index to determine home purchase or mortgage refinance interest rates.
Timing
Since interest rates change daily, the longer a lender locks in interest rates, the higher the risk that the market will move against it. 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 get a lower mortgage interest rate by paying extra points, mortgage costs that are up-front, rather than built into interest rates. 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, saving you money over the life of your home purchase or mortgage refinance 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 rates. If you find yourself in this position, there is still hope.
Debt-to-Income Ratio
When determining your interest rate on a home purchase or mortgage refinance loan, your monthly debt obligations are calculated against your current income. The higher the ratio, the higher the risk, sometimes causing higher interest rates.
Loan-to-Value Ratio
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 lower interest rates.
Property Type
Lender risk plays a big part in mortgage rates today. For instance, a loan for a single-family home is less risky than for a multi-family home because there are fewer variables. The less risk, the better the interest rates.
Occupancy
If you plan on living in the home you are purchasing, you'll 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 borrowed sometimes affects interest rates.
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