Things You Can Control
Mortgage rates are set based on how risky the lender determines it will be to lend you money. The riskier the loan, the higher the rate. Before getting offered a rate, your lender will assess how likely you are to fall behind on payments, and how much money theyll lose if you stop making payments altogether. Here are just some of the rocks theyll overturn before making that call.
The most important thing a lender considers is your which is probably the clearest benchmark of the risk you pose to the lender. Scores are derived using many points of data, grouped into five categories. They are:
The higher the credit score, the less risky the borrower is.
- If credit scores are under 620, something in your history says you might be a risk. Youll still be able to buy a home, but interest rates will be high and you wont have as many loan products to choose from. Some may even require mortgage insurance.
- Borrowers with credit scores from 621 to 699 fare a little better. Mortgage interest rates may be lower, but youll still be considered risky. And you may have trouble getting a jumbo loan or financing for a vacation home.
- Things start opening up once you achieve a credit score from 700 to 740. Youll be offered the lowest mortgage rates and have your pick of the best loan products.
How The Overall Economy Affects Mortgage Rates
Both the Federal Reserve and the overall markets are reacting to the ups and downs of the economy as a whole. Here are a few examples.
Generally, if people believe were in prosperous times, theyll move their money into stocks and away from bonds for the chance at a higher return. Mortgage rates end up moving up. If investors believe were looking at a downturn in the future, money gets moved back into bonds and mortgage rates go down.
Inflation also plays a role. When inflation is higher, people are more incentivized to invest in stocks. The reasoning is that the guaranteed rate of return on bonds gets eaten into as inflation rises. If a bond pays you back 5% and the money supply is increasing at a rate of 3% per year, youre only getting an effective 2% return.
Finally, unemployment plays a part. If more people are unemployed than the Fed would like to see, they tend to lower interest rates to stimulate borrowing, which in turn may be used to help grow a workforce.
The Driving Force Behind Mortgage Rates
Mortgage rates are a substantial element of the home buying process. While you likely know what a mortgage rate is if you have begun your home purchase journey, understanding what drives those rates may not be familiar territory.
The average interest rates affixed to home mortgages often fluctuate based on a few different factors. Understanding these can help you better comprehend when your chances increase for a lower interest rate.
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Your Financial And Credit Picture
Lenders have to ensure you can repay your mortgage, and they do that by assessing your risk of default. Lenders pay close attention to your debt-to-income, or DTI, ratio, and your credit score. Your DTI ratio is the sum of all of your monthly debts in relation to your gross monthly income.
Generally, the higher your DTI ratio, the riskier you appear to a lender and the higher your interest rate will be. As a general rule of thumb, conventional lenders want to see your DTI ratio stay below 43 percent, but some loan programs will consider borrowers with a DTI ratio as high as 50 percent.
Your credit score is another indicator of your ability to manage debt and pay bills on time. Borrowers with a lower credit score pay higher interest rates and have more-limited loan options if their credit is less-than-stellar.
As mortgage rates fall, your DTI ratio falls, too, because a lower rate will drop your monthly mortgage payment, which is included in your DTI ratio calculation. As a result, you could afford to buy more house, Selitto says.
Don’t Forget Taxes Insurance And Other Costs
If you’re buying a home, you’ll also need to consider some other items that can significantly add to your monthly mortgage payment, even if you manage to get a great interest rate on the loan itself. For example, your lender may require that you pay for your real-estate taxes and insurance as part of your mortgage payment. The money will go into an escrow account, and your lender will pay the bills as they come due. These costs are not fixed and can rise over time. Your lender will itemize any additional costs as part of your mortgage agreement and recalculate them periodically.
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Top 12 Factors That Determine Interest Rate
What Determines Your Mortgage Interest Rate
If youre shopping for a home, youre probably paying attention to what interest rates are doing. There are numerous resources available to check average mortgage rates in your area. Researching rates can give you an idea of what to expect, but the mortgage rate for your specific mortgage loan depends on several key factors.
Review what determines your mortgage interest rate before you meet with your lender, so you have a realistic idea of what to expect.
The better your credit score, the lower your mortgage rate. Building credit and maintaining a positive credit score is one way to show lenders you are capable of repaying your mortgage loan. Now, a perfect credit score wont necessarily mean youll get a rock-bottom interest rate, but a little credit repair goes a long way. Most financial experts suggest starting credit repair at least six months to one year before buying a home.
Mortgage rates will also vary from region to region. State and local regulations influence interest rates. The mortgage rate also depends on the financial stability of the local market. In an area where homes are foreclosed frequently, or homeowners are consistently making late payments, home buyers will likely face higher mortgage rates.
Home Price, Loan Amount, and Down Payment
Fixed or Adjustable
Type of Loan
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Constant Maturity Treasury Rates
Constant Maturity Treasury rates, or CMT rates, refer to a yield thats calculated by taking the average yield of different types of Treasury securities with varying maturity periods, and using it to adjust for a number of time periods.
Some lenders will use this rate to determine interest for adjustable-rate mortgages . If the CMT goes up, you can expect any loans tied to it to increase their interest rates as well.
The Three Factors That Determine Mortgage Rates
There are three factors that influence your mortgage or refinance rate.
Well describe each of these factors in detail below. But heres a brief overview of how all three work together to determine your mortgage rate:
- The strength of the U.S. economy sets the overall tone for mortgage rates. When the economy is strong, rates tend to rise. When its weak, rates tend to fall
- Individual factors determine whether you’re on the high or low end of the mortgage rate spectrum. For instance, say the economy is in a lowrate period, averaging around 3% for a 30year loan. A borrower with high credit and a big down payment might get a rate closer to 2.5%, while someone with lower credit could be offered 3.5%
- Lenders offer different rates to different customers, depending on what types of loans they specialize in and how much capacity they have for new business. Thats why its important to shop for mortgage rates with more than one lender
If youre currently shopping for mortgage or refinance rates, that last point is probably most important.
You cant change the overall rate environment. And unless you have a few months, its tough to raise your credit substantially or save for a bigger down payment.
But you can always shop around with multiple lenders.
Odds are, theres a lower rate out there than the first one youre offered. You just have to look for it.
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What’s The Difference Between A Mortgage Rate And Apr
Your mortgage rate is one component of the figure that makes up your annual percentage rate . For this reason, your .
Your mortgage interest rate only covers the cost of borrowing a specific amount of money from a lender and is the actual rate used to calculate your monthly principal and interest payment The APR covers a broader spectrum of the costs involved in a mortgage, including:
- Broker fees
- Discount points
- A portion of your closing costs expressed as a percentage
When comparing APRs for different loans, it’s important to ask your lender what’s included in your APR and how the terms of your loan affect the amount.
What Is Mortgage Amortization
Amortization is a process lenders use to calculate how much interest you pay on a loan and when. With a mortgage loan, as with any loan, you’ll pay more interest at the beginning of the loan term and more principal toward the end.
This is because your interest rate is being applied to a higher loan balance at the beginning, then as you pay more and more of the principal loan amount, the balance the rate applies to decreases, which brings down your interest charges.
Calculating amortization on a mortgage loan requires some complex formulas, and it’s best to use an amortization calculator. You’ll need the loan amount, interest rate and loan term. With an amortization calculator, you’ll be able to see several things, including:
- How much total interest you’ll pay over the life of your new loan.
- How much interest you’ll pay each month.
- How much interest you’ll pay with a 15-year mortgage versus a 30-year mortgage, or a fixed-rate loan versus an adjustable-rate loan.
- What your loan balance will be at the end of each monththis can help if you’re paying private mortgage insurance and want to know when you’ll reach an 80% loan-to-value ratio and can get rid of it.
As an example, we used an amortization calculator to run the numbers for a $300,000 loan with a 4% interest rate and a 30-year term.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
How To Change Your Existing Mortgage Rate
If you’re having difficulty meeting your monthly payments or simply want to take advantage of current lower mortgage rates, you may be able to change your mortgage rate. It’s important to note that these options may l also change other terms of your mortgage.
- Refinancing: Refinancing your loan is the most common way to change your mortgage rate. Refinancing means youâre replacing your loan with a new one. It can help you lower your monthly payments and possibly reduce your total payment amount.
- Loan modification: Mortgage modification programs provide opportunities for homeowners to change the terms of a mortgage.
Your mortgage rate is one of many factors that affect your monthly mortgage payment and the total amount you pay for your home. Taking the time to learn about mortgage rates and how they fluctuate could help you get a lower rate. Talk with a Home Lending Advisor about getting the right rate for you.
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How Occupancy Affects Mortgage Rates
Another factor that really plays into your mortgage rate is how you plan to occupy the property. Is it a primary home, second or vacation home, or an investment property?
You get the lowest rate on a primary property, while rates may be slightly higher for a vacation home and slightly higher again for an investment property. This again goes back to risk.
If you get into financial trouble, youre going to make the payment on your primary property before you would make one on your second home. Similarly, you may make the payments on your vacation home before you make it on a rental property that you dont live in and have an attachment to beyond collecting rent.
Impact Of Mortgage Interest Rates On The Market
Mortgage rates dont directly impact home prices, but they do influence housing supplywhich plays a big role in pricing. As mortgage rates rise, existing homeowners are less likely to list their properties and enter the market. This creates a dearth of for-sale properties, driving demand up and prices with them.
When rates are low, homeowners are more comfortable selling their properties. This sends inventory up and turns the market in the buyers favor, meaning more options and more negotiating power.
It depends on how much rates rise, however. It can stifle demand if rates rise for too long or get too higheven for the few properties that are out there. That would force sellers to lower their prices in order to stand out.
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How Are Interest Rates Determined
If you have or are currently lender shopping before deciding where to get your loan, youll notice that the interest rate offered varies from place to place. Simply put, interest rate is a reflection of risk. When the market identifies a higher risk, this demands a higher rate of return.
Theres always more to a lender than the interest rate alone, but there are around 26 different factors that go into quoting your interest rate.
How Does The Government Decide How Much Interest To Pay To Its Bondholders
The government doesnt really decide how much interest itll pay. Its the buyers of the bond who decide so. Or investors, as we call them. Just like you dont decide how much rate youll pay on your home loan. Your bank does.
And how do investors come up with that rate? Well, when lending to the US government, default risk isnt really a big issue. Why? Because the US government has the power to just raise taxes and pay back whatever it owes.
The biggest risk investors face is the risk of inflation. If things become expensive over time, they want their money to keep up and grow. In other words, if the price of all goods increases by 2% on an average every year over the next 10 years, they want their money to grow at the same rate. That way, in ten years, they can afford the same things they can buy today with their money.
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Continue To Monitor Your Credit After You Buy A Home
Making a good impression when applying for a mortgage loan is crucial, but it’s important to remain vigilant with your credit score after you get into your home. Experian’s free credit monitoring tool can provide you with a lot of the information you need to stay on top of your credit and continue to improve it.
The service provides free access to your Experian credit report and FICO® Score powered by Experian data. You’ll also get real-time updates when new inquiries, accounts and personal information are added to your credit report.
With these features, you’ll be in a good position to track your progress, spot issues as they arise and address them before they do significant damage to your credit score.
Meet Fannie And Freddie
Fannie Mae and Freddie Mac are huge financial institutions that buy mortgages and bundle them into securities that behave like bonds. Then they sell the mortgage-backed securities to investors.
Fannie and Freddie exist to keep money flowing through the mortgage finance system. When you get a mortgage, the lender sells the loan on the secondary market. By selling the mortgage, the lender gets its money back quickly so it can lend the money again, to another mortgage borrower.
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