Mortgage rates change because they depend on a lot of things. So it's important to know a little bit about how mortgage interest rates are set. The more you know about the economic factors that affect rates, the easier it will be for you to find the best home loan with the best interest rate for you.
How the market works
When the Federal Reserve Board raises or lowers rates, it usually has an effect on the rate you get for your fixed-rate home loan, though it's not as clear-cut as it may seem. The federal funds rate, which is the rate at which banks lend money to each other, is changed by the Federal Reserve. When the federal funds rate goes down, we spend more money, which can make inflation go up. Mortgage rates are usually longer-term rates that change based on inflation fears and other economic factors like job growth. So it's more accurate to say that the Federal Reserve Board has an indirect effect on mortgage rates and that what happens every day in busy public markets has a more direct effect. The market sets the interest rate, and a margin is added to the index to get the final interest rate for your mortgage.
Timing
Rates change every day, so the longer a lender locks in a rate, the more likely it is that the market will move against them. So, for a longer guarantee, you pay more (in points). If it looks like interest rates will go up, it makes sense to lock in your rate. If they keep going down, it makes sense to let your interest rate float so you can save money by not being locked in for as long.
Points
Most of the time, you can get a lower mortgage interest rate if you pay extra points, which are mortgage costs that you pay up front instead of having them built into the interest rate. Each point is equal to one percent of the total loan amount. For example, one point on a $100,000 loan is the same as paying $1,000 to get a lower interest rate that will save you money over the life of your loan.
History of credit and payments
If you don't have a perfect credit history, you might seem like a high credit risk. This means you'd only be able to get mortgage loans with higher interest rates. Don't worry if you're in this situation. We have loans that could still help you make your dream come true.
History of credit and payments
If you don't have a perfect credit history, you might seem like a high credit risk. This means you'd only be able to get mortgage loans with higher interest rates. Don't worry if you're in this situation. We have loans that could still help you make your dream come true. Find out more about Loans for Bad Credit.
Ratio of debt to income
Your current income is used to figure out how much you owe each month. The risk goes up as the ratio goes up, which could mean that the interest rate goes up.
Loan-to-Value
The loan-to-value is the difference between how much you need to borrow and how much the home you want to buy is worth. The more equity you have or the more money you put down as a down payment, the less risk you pose to a lender. This often means that you get a better rate.
Type of Property
Your rate depends a lot on how risky the lender is. For example, because there are fewer variables, a loan for a single-family home is less risky than one for a multi-family home. The better the rate, the less risk there is.
Occupancy
If you plan to live in your new home, you may get a better rate than if you plan to rent it out. This is because a loan on a rental unit is riskier for the lender.
How much money was borrowed?
The interest rate you get could depend on how much money you borrow.
