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It’s only natural to want to get the lowest possible mortgage rate if you’re buying or refinancing your house. In today’s economy, it is sometimes easier said than done. Everyone can agree that mortgages are a commodity and you’re not going to get any special benefits just because you’re paying higher rates each month. So how then can you ensure that you’re getting a great rate on your mortgage? Is there something that can be done to ensure that you’re getting the best possible rate on your mortgage? These factors may help to influence your mortgage rate.
What’s A Mortgage Rate?
A mortgage rate is what determines the amount of interest that is accrued on your home loan throughout the loan. Higher rates will have a higher interest and in turn, the more you’re going to pay for your mortgage each month. One of the most important things to do from a financial perspective is to be aware of whether or not your mortgage rate is fixed or adjustable. Let’s examine this in more detail.
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Fixed Rates
A fixed-rate mortgage is the amount of your mortgage payment that is going towards the principal and your interest rate is going to remain the same for the life of the loan. While you may pay more toward the principal than the interest over time, the actual amount of your payment isn’t going to change while you’re paying off the loan. You’ll know from one month to the next what you’re going to pay and you won’t have to worry about it changing. It will remain consistent. You can also opt to pay off earlier in most cases.
Adjustable-Rate
An adjustable rate or ARM is going to work slightly differently. Typically, they will start with a lower rate. The “teaser rate” will remain for a few years, typically 5, 7, or maybe 10 years. After this time, the rate may adjust periodically and it may go up or down according to how the market is doing. ARMs start with a lower rate, however, they are very risky as they will go up over time. If you’re okay with the fluctuation of the market, that’s great.
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Factors That Affect Mortgage Rates
Here are some factors that may affect the interest rate on your mortgage. Different factors will affect different people differently. Consider all of the factors when determining which mortgage loan to go with.
Market
Before you can understand how mortgage rates are set, you’ll want to understand some about the mortgage market. When you are seeking a mortgage, it’s typically bought by a mortgage investor and then it’s made available on the bond market as a part of mortgage-backed security or MBS.
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Mortgage-backed securities are considered safe for investments as it is assumed that borrowers are going to make sure that they are paying their mortgage on time each month. However, as most safe investments go, the rate of return is usually lower. For those who feel optimistic about their economic future and that of the country, more money may be found in the stock market although it’s riskier, however, this can offer a greater reward in the end.
For those who are more pessimistic, turning to a safe asset in the bond market such as an MBS may be the better route. Yields can run inversely with demands in the Mortgage-backed securities market. Higher demands for MBS will equal lower yields to investors. Lower yields will make for lower mortgage rates.
Type Of Loan
Some loans are much more likely to have a higher rate than others. Typically speaking, lower qualifications will equal a higher rate on a loan. Let’s examine some of the different types of home loans.
Conventional: These typically have a lower rate of interest as they require a higher credit score and down payment.
FHA: These are fairly easy to qualify for and it’s okay to have a lower credit score and a higher debt-to-income ratio.
DTI: Mortgage rates may be higher for government-backed loans, however, they’re fairly competitive with conventional loans.
VA: For qualifying veterans and their surviving spouses. Rates may be slightly lower.
USDA: These also have a slightly lower interest rate however, you’ll have to live in a rural area to qualify.
Jumbo: With a competitive rate or a lower-than-average rate these are risky for lenders. They may be fixed or adjustable.
Primary Vs. Secondary
If you’re going to be taking out a second mortgage, it’s also going to impact the rate of your mortgage. If you’re doing it to access the equity, as many do, your first mortgage is still the priority. Should you have any financial difficulties, your primary mortgage is what is paid off first. There is a huge risk increase with these types of loans. Second mortgages are slightly higher rates than primary. You can opt for a cash-out refi if you’re taking the equity out and sometimes get a lower rate. Additionally, you can also roll the second mortgage into the refi on the primary.
Income
Income and your DTI also impact your mortgage rate. It won’t take a personal finance wizard to figure out that higher incomes mean that there are more resources at the ready. This doesn’t mean that you have to be a millionaire if you’re going to purchase that $250,000 house, however, the lender needs to see that it’s going to be very comfortable for you to pay your mortgage each month. They determine this when they look at your DTI ratio.
We’ll explore this further below, for now, understand that the higher your income, the more money you should have to pay off your debts and this includes a mortgage.
Property
As interest rates are about risk, you need to understand what you’re able to afford when you buy a house. If you’re going through a hard time and paying off debts, you know how to handle your money. Interest rates are always higher for second homes or investment properties. That’s because if something goes wrong, you’re more likely to make a payment on your primary home than that of a second home or your investment. Interest rates are based upon whether or not the dwelling is a single-family dwelling or a multiplex such as a condo.
Assets
It can work in your favor to have higher assets. Assets are those things that aren’t related to your income annually that you can use to help pay off your mortgage. It may be proceeds from property or stocks, mutual funds, bonds, or other monies. The more assets that you have, the easier it is going to be to repay your bills and lower your interest rates.
Credit
Every lender is going to review your credit score and your credit history. Typically, the higher your FICO credit score, the lower your interest rate. Credit scores are maintained by timely payments for your bills, car, credit cards, house, etc. A credit report also helps to determine if you’re living within your means.
Are you paying your debts comfortably? If you’re making $5000 monthly and paying out $1250 toward student loans or other bills, then your DTI would be 25 percent. The lower your DTI the less risk you give to a lender. For more details on this, you can read how your credit score affects your mortgage rate and eligibility here. The better the credit score, the lower your rate.
What Is A Good Mortgage Rate?
Now that you understand your mortgage rate and how it’s determined, you likely want to know what a good rate is. How low should your interest rate be to qualify as “good”. Sadly, this isn’t an easy answer. After your determining factors are reviewed, you can see that there are many factors to consider. The term “good” is usually relative when considering your rate.
Current Market Rates
A good rate can mean that it’s low for the current market. You can review the current market rates and see what an average or typical rate is at present. If you’re curious, you may also wish to review the historical rates. For example, what was good in the 60s or 70s will be very different from today’s rates.
Your Finances
Another way to look at a good mortgage rate other than current market factors is to study the interest rates and CMT rates. Here you’ll see how to get the best rates on your financial situation. Your interest rates will have many determining factors including your income and personal property, credit, etc. If you’re okay comparing options, you can find out by shopping around for the best rates for today. Compare a variety of rates to ensure that you’re getting the best possible rates for your mortgage. Only then can you make the best-educated decision on your mortgage loan.