In this article
- An Overview of Mortgage Rates
- Frequency of Rate Changes
- 15-Year vs 30-Year Mortgage Interest Rates
- What Market Factors are going to Affect Mortgage Rates?
- Federal Reserve
- Bond Market
- Secured Overnight Finance Rate
- Constant Maturity Treasury Rates (CMT Rates)
- The Overall Health of the Economy
- Personal Factors Affecting Mortgage Rates
- Credit Score
- Which Score Do You Need?
- Down Payment
- Loan-To-Value Ratio
- Estimating your mortgage rate
- Bottom Line
There are many factors that are considered when determining mortgage interest rates, but there is only one factor you have control over, the personal factors. The lenders look at qualifying factors before determining a borrower’s risk level. When you have good qualifying factors, it becomes easier to get a good interest rate. The current market rate is where everything starts. How does the market affect the interest rate? What most people don’t know is the overall economy in the country has a big impact on the mortgage interest rates.
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The interest rate is one of the most important things when it comes to choosing a mortgage. When you get a low-interest rate, you will have affordable monthly payments. High-interest rates can be difficult to afford even if you have been approved for a mortgage. This article is going to look at how the rates are determined, and what you can do to get a good rate. This is a comprehensive guide on interest rates on mortgages.
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An Overview of Mortgage Rates
When a country has a good overall economic outlook, the rates tend to increase. The rates decrease when the economy is not looking good. There is a reason for this, although it seems somewhat backward. Borrowers can afford more when the economy is doing great. When there isn’t an increase in interest rates, the demand for mortgages is higher than the supply capacity. Increasing the interest rates slightly is going to ensure everyone is on the same level. When the economy is not doing that great, the interest rates are decreased so it becomes affordable to more people.
Frequency of Rate Changes
Interest rates can change more than once a day. The lenders get rate sheets daily. If there is an interest rate you currently have in mind, then it is a good idea to talk to a lender so that you can lock it quickly before it changes.
15-Year vs 30-Year Mortgage Interest Rates
If a borrower can afford a 15-year mortgage, they are going to get a lower interest rate. A 15-year mortgage is going to mean higher repayments. The reason why a 15 year has a lower interest is that a 30-year mortgage costs the lender more. When the lender receives their money in half the time, then the borrower is rewarded with a lower rate.
What Market Factors are going to Affect Mortgage Rates?
Many think that the Federal Reserve is the one setting mortgage rates, but it doesn’t. The Federal Reserve affects the rate. They are the ones controlling short-term interest rates by decreasing or increasing them depending on how the economy is. The rates from the Federal Reserve aren’t tied directly to the mortgage rates. When the Federal Reserve’s rates change, the mortgage rates follow the same route.
They use short-term mortgage rates to control the money supply. When the country is doing bad economically, they lower the rates – this was seen during the COVID-19 pandemic. During the pandemic season, you might have heard about rates closer to 0%. The rates aren’t what consumers are given, but rather it is the rates lenders can borrow money and then lend it to borrowers.
The Feds will increase the rate when they want to tighten up the money supply. This move might not directly increase mortgage rates, but the banks are going to do the same since the cost of borrowing money from the Fed to lend it to you has increased.
Mortgage interest rates tend to be tied to the 10-year Treasury Note that is tied to the bond market. Mortgage-backed securities are bundles of mortgages that are being sold on the bond market. They affect mortgage rates and it depends on the demand. If the stock market is not going well, the demand for mortgage bonds increases. This causes the mortgage rates to increase. The mortgage rates are going to decline when the demand for mortgage bonds is low.
Secured Overnight Finance Rate
Secured Overnight Finance Rate or SOFR is the interest rate on borrowing overnight from banks and lenders. Lenders use SOFR when determining a mortgage-based interest rate and it will depend on the type of loan. The SOFR has become more and more popular because it has served as the replacement for the London Interbank Offer Rate or LIBOR. LIBOR was used before, but it was phased out at the end of 2021.
Constant Maturity Treasury Rates (CMT Rates)
They are a yield that is calculated using the average yield of different kinds of Treasury securities with different maturity periods. The average yield will be used in adjusting for different periods. There are lenders using the rate when determining the interest for adjustable-rate mortgages or ARMs. When CMT increases, the same is going to happen to the interest loans of loans that are tied to it.
The Overall Health of the Economy
Mortgage interest rates can go up or down based on how the economy is currently looking. When the country has low unemployment rates and the spending is high, it means the economy is doing good. In such times, the interest rates go up. When the economy is not doing well like during the COVID-19 pandemic, the interest rates go down.
Mortgage rates and inflation go hand in hand. Interest rates are going to increase when inflation is on the rise to keep up with the value of the dollar. When inflation decreases, the interest rates go down. When there is low inflation, the mortgage interest rates fluctuate slightly or stay the same.
Personal Factors Affecting Mortgage Rates
There are many personal factors that might affect the interest rate you get when applying for your mortgage. Lenders usually have interest rates that are meant for “risky borrowers” while there are rates for “best borrowers.” You don’t have any control over the economic factors mentioned above, but you have control over the personal factors that affect your rate. Below are some tips to help you get the best rates when buying your dream home.
When you have a high credit score, it means you are less of a risk to lenders. Make sure you pay your bills on time and avoid overextending your credit. When the lender looks at your credit, they are going to see that you are a responsible borrower who has a low risk of default. You are going to get a good interest rate – it is going to be closer to the one advertised – because they don’t adjust for low credit scores. For those with a lower credit score, the lender is going to adjust the interest rate because they are seen as having a high risk of default.
Which Score Do You Need?
This will mainly depend on the loan program. If you want a conventional loan not backed by the government, you need to have at least a 620-credit score. If it is FHA financing, you need to have a 580 or more credit score. How can you improve your credit and put yourself in a good position to get a good interest rate from a lender?
Lenders like borrowers who are invested in their homes and you can do this by making a down payment and not borrowing 100%. You are less likely to default when you have more money invested in your property. Your interest rates are going to be higher when you have less than 20% of the property value. You will be forced to include mortgage insurance when buying the property.
There are different types of mortgage insurance and it will depend on the loan program: there are those that are cancellable, while some aren’t. When you have a low-down payment, you are at a higher risk of default, and the lender is going to make up for that risk by increasing the mortgage interest rate.
Lenders are going to compare the down payment made to the loan amount, and this is referred to as the loan-to-value ratio or LTV. When you have less money as a down payment, your LTV becomes higher which makes it a higher risk for the lender or bank. When you have less money invested in the property, you don’t have much incentive to pay the mortgage when things start getting tough financially. If you have more money in the house, you will most likely try your best to pay the mortgage even if things are hard.
Banks are going to charge a higher rate when there is an increase in risk. If you want a $200,000 mortgage with a 3% down payment, your share in the house is going to be just $6,000. If you make a 20% down payment, it means that you have a $40,000 share in the house. The difference between $40,000 and $6,000 is huge. Banks are going to reward the borrower with a higher down payment with a lower interest rate.
Banks are going to care if you plan on occupying the house you are buying or if it is your primary residence. Banks usually offer borrowers a better interest when it is their primary residence compared to investment properties and second homes. When the property is the primary home, you are more likely to make the payments on time because you don’t want to lose your home. when it is an investment property or a second home, you are more likely to default when things are not well financially. Lenders are going to give such borrowers a higher interest rate in order to cover that risk.
Estimating your mortgage rate
You can estimate your rate using an online mortgage calculator. The information you are going to need include;
– Estimated house price
– Down payment
– Loan term
– Property tax and home insurance amounts
– Interest rate
– Zip Code
Check out the current interest rates and where you fall. The best way of knowing the type of loan you are going to get is by being pre approved for a mortgage loan. You can easily estimate the interest rates by using the current rates, but you need to know your LTV or loan-to-value ratio and credit score.
The mortgage interest rate is going to influence your monthly payments. Market and personal factors are going to affect your interest rates. You have control over personal factors, and you can improve your credit score and save more for the down payment. Personal factors play a big role in determining the mortgage interest rate you are going to be offered when buying your dream home. Check out online mortgage calculators to know how much mortgage you can afford.