You may be wondering how mortgage rates are decided. Obviously, you want to make sure that you get the lowest rate possible, but how are mortgage rates determined, and what can you do to make sure you have a low rate?
Thereare severaloutsidefactorsthataffect how mortgage rates are determinedas we have seen over the past few months. However,there are your own personal factors that can have a significant impact on not only rates but the cost of your loan and maybe evenimpact if you can qualify.The better yourpersonal orqualifying factors, the better the interest rateyou can get.
Mortgage rates are affected by the overall economy. When the economic outlook is good, rates tend to increase, and rates fall whenthe outlook is not so great.Mortgage rates are determined by many elements, including the inflation rate, the pace of job creation, and whether the economy is growing or shrinking.
The Federal Reserve doesn’t set mortgagerates, but it does affect mortgage rates indirectly. The Fed controls short–term interest rates by increasingthe overnight rate that banks can charge each other for holding fundsor decreasing them based on the state of the economy. While mortgage ratesaren’t directly tied to the Fed rates, when the Fed rate changes,theprime ratefor mortgages usually follows suit shortly afterward.
The Federal Reserve controls short–term interest rates to control the money supply. When the economy is struggling, ashas been the case during COVID–19, the Fed lowers rates. These are not the rates given to consumers, but the rates at which banks can borrow money to lend to consumers.
When the Fed decides they need to tighten up the money supply, they raise the Fed rate. While this doesn’t directly increase mortgage rates, eventually,this filters through to mortgage rates One more detail. Mortgage rates are directly tied to mortgage–backed securities which are traded every day in the financial markets.Rates do change up and down daily (and sometimes hourly) basedon the sale of these bonds.
It is important to be connected with a loan officer that understands how the market works and can provide guidance as to when to lock a loan and the best strategy for your transaction.
Which Personal Factors AffectYourMortgage Rate?
You certainly cannot control the economic factors of mortgage rates, but you can most definitely control your own personal factors. Let’s dive into what you can doto get thebest mortgage rate possible, beginning with your credit score.
A highcredit scoremeans you’re less of a risk to lenders. A high credit score shows thatyou pay your bills on time and don’t overextend your credit. When lenders pull your credit, they see you as aresponsible borrower with a low risk of default.
This leads lenders to give you a better interest ratebecause you are less of a risk. When you have a low credit score, lenders often change the interest rate significantly because you’re at a higherrisk of defaultfor the mortgage you are getting. A low credit score indicates that you may not pay your bills on time or that you have overextended yourself.
Taking steps to check andimprove your creditwill put you in a better position to get a lower rate. Maximizing your credit score or improving a bad credit score is a whole different video and is not something you should do on your own and I wouldn’t recommend so–called debt consolidation providers. You can give us a call as a start.
A loan–to–value (LTV) ratio compares the amount of a loan you’re hoping to borrow against the appraised value of the property you want to buy.The less money you put down on the home, the higher your LTV becomes, which is a higher risk for the lender.
When you put little money of your own into the home, you have less incentive to keep paying the mortgage when times get tough. If you have your own money invested, though, you’re more
likely to do what’s necessary to make good on the debt. Lenderscharge higher interest rates when there is a higher risk, which means if you put more money down you have more to lose. Another factor lenders will look at when raising your risk is how you intend to occupy the house.
Lenderslike it when the propertyis yourprimary residence, which means that you will be living there.Interest rates are usually lowest on primary residences because it’s where you live. You’re more likely to make your payments on time because you don’t wantto lose your home Interest rates are higher on a second home,orvacation property andeven higherif the home is an investment property that you will rent out to others.
If you have a second home or investment property and you have financial issues, you’re more likely to default on the mortgage, putting the lender at risk.
The Bottom Line
The bottom line is that both market and personal factors affect your mortgage rate. While you can’t do anything about market conditions, you can control your personal factors. Improving your credit score and saving for a larger down payment are two of the best ways to improve your chances of securing the best mortgage rates.
Be sure to take care of what you can control about mortgage rates by looking closely at your personal factors and making them as good as possible to ensure you get the best interest rates available when applying for a mortgage.Always be sure to work with a licensed mortgage professional and get your questions answered.
Ifyou or someone you know is looking to buy or refinance or just get your questions answered, please contact me atthe contact information below.I look forward to helping you get into the house of your dreams!