How Mortgage Rates are Determined
When looking for a mortgage, one of the most important factors to consider when agreeing to a mortgage is the interest rate. The interest rate you get makes a big difference in how much you’re paying both monthly, and the total cost of the home.
For most, this is the biggest purchase of your life, and you’ll want to plan as much of it as you can. Making sure you get the best interest rate you can is a big part of that, but to plan for that you need to know how the mortgage interest rate is determined. There are multiple factors that go into it, and in this blog, we’ll list 8 factors and explain how they affect the interest rate.
Your credit score is a key component of any type of loan, as it provides a record of your lending history. The better your score, the more trust lenders will put in you as you’ve shown the ability to pay back your loans and stay on top of them. The lower your score, the less trust they’ll have and the more contingencies may arise, such as a higher interest rate (or mortgage insurance in some cases).
The location of your home can have a big effect on your mortgage rates, as you’ll find different states, and even different cities and counties will have different laws and regulations. You’ll find some states or more expensive counties may have higher mortgage rates, due to bigger loans (including jumbo loans) being tougher to provide. Which leads into the next factor.
-Home Price and Loan Amount
The overall price of your home and the amount of your loan will affect your mortgage rates as well. The more expensive your home, and thus the greater the loan, the tougher it becomes to grant a loan as jumbo or even super jumbo mortgages may be needed. These loans are also riskier to offer, and an increased mortgage rate helps them cover costs, and provides themselves with some peace of mind in the case it goes bad.
Your down payment will affect the mortgage rate is either positively or negatively, depending on how much you put down. The lower your down payment, the greater the loan amount and thus the higher the risk, so your mortgage rate will be higher. But, with a greater down payment, the less you have to loan, the more trust lenders will have in you and thus the lower your mortgage rate will be.
-Loan Purpose (Purchase, Refinance, Cashing Out) and Purpose for Residence
The purpose of your loan and for the home itself, both have the ability to influence your mortgage rate. Purchasing a new home versus refinancing a current loan are very different prospects and have different risks and variables associated with them. Similarly, someone buying their first home will look different than someone buying a second home and histories with such will be influencing factors.
The term of the loan can heavily influence your mortgage, as generally a shorter loan means a lower interest rate. However, shorter terms typically mean higher monthly costs, which is the balance that one needs to consider when choosing their loan. While a longer loan may have you pay more over the life of it, that may be worth it if you can’t pay more each month in the short term.
The current state of the economy will always be a factor for your mortgage rate, as economic growth, market trends, inflation, and current policies and laws will all play a role in what your mortgage rate is. Keeping an eye on trends and the current economic state can help you choose when the best time to go after a mortgage is.