Like most things in this world, mortgages are not always what they seem to be on the surface — instead of being a straightforward loan so that you can purchase and pay off a home, there are hidden fees in the form of mortgage interest rates. There’s nothing to fear, though: Mortgage interest rates are dependent on a whole bunch of different factors, some of which you can control and some of which you cannot. Understanding this is the key to understanding how mortgage interest rates are determined.
As is the case with most forms of interest on most forms of loans, mortgage interest rates are put in place to ensure that the lender and the borrower are both agreeing to do their part to make things mutually beneficial. The lender agrees to pay the borrower a set amount of money so that the borrower can get what they want (in this case, a home), while the borrower agrees to pay that money back within a certain amount of time.
Of course, though, no lender would simply agree to these terms without some sort of way to guarantee that the borrower will keep their word and pay the money back. This is understood by the borrower, as well. This is the concept behind interest rates, which rise and fall depending on… well, factors. Those factors can range anywhere from spontaneous to completely within your control. It’s important to understand that distinction.
The truth is that mortgage interest rates are determined more by factors outside of your control than inside it. That doesn’t mean that they aren’t worth paying attention to and understanding, though. While they might be out of your control, that doesn’t exactly mean they’re set in stone forever. They actually change quite often, and even though you have no control over them doesn’t mean you should ignore them. Pay attention to these factors, because they’re just as key as the factors you can control yourself.
First and foremost, the economy is by far the most influential factor in determining mortgage interest rates. Depending on the state of the nation’s finances, you can expect mortgage interest rates to rise and fall with the rise and fall of the economy itself. This is pretty much a given, and it’ll always be this way. After all, mortgages exist within the economy, not outside of it.
The Rate of Inflation
Like with the rise and fall of the economy, mortgage rates will always change alongside the national rate of inflation. The price of goods and services is directly impacted by the shape of the nation’s economy, and mortgage interest rates are inherently linked to that rise and fall simply because it involves large sums of money being loaned out.
The Unemployment Rate
It might seem like a higher unemployment rate would result in higher mortgage interest rates, but the opposite is actually true: higher unemployment will bring lower interest rates because lenders want borrowers to actually be able to afford the loan while still being able to pay an interest that they can handle. Lenders still need to make money off of interest, but if more people are losing their jobs, they might not be able to afford a higher rate. So, down it goes.
Beyond these major factors, there’s a whole array of important trends that play a part on a microscopic level in the rise and fall of mortgage interest rates: Things like stock prices, the amount of retail sales being made, the amount of homes being sold, and even the earnings of top corporations have a much smaller but still significant impact on interest rates throughout the country.
The Federal Reserve
Last but not least, there’s the Federal Reserve to take into account. While they have no way of controlling the mortgage interest rates that lenders set, they do have a major role in setting similar interest rates for the banks themselves and the money they borrow from the Federal Reserve. When their interest goes up, you can bet that mortgage interest rates will go up, too. This is just how the chain of command works.
Now that the factors that are out of the borrower’s hands have been made clear, it’s worthwhile to explore the factors that you can control and discuss how they can get you a better, fairer rate in the long run.
Your Credit Score
More than anything else, a good credit score will help to secure a good mortgage interest rate. Lenders will be able to take one look at your credit score and instantly know all they need to know about you as a borrower, and this will directly influence the kind of rate you end up with. If you have a low enough score, you might not even get a chance to borrow in the first place.
Your Loan-to-Value Ratio
Just as important as a good credit score is a low loan-to-value ratio. This number tells the lender how much money the home is worth and compares it to how much money the borrower needs to pay it off. For example, if you pay off 10% of the home with your down payment, then your loan-to-value ratio would be 90%. The more you pay off, the lower that ratio will be, and the better interest rate you’ll end up with.
Other Key Factors
Beyond credit score and loan-to-value ratio, there are some smaller factors that rest in your hands: things like the kind of property you’re buying, the level of risk associated with that property, and whether or not it’s going to be used as an investment for the home buyer or as a place they’ll actually be living in.
It’s clear to see now how mortgage interest rates are determined, but one question arises now: Are all lenders going to treat you the same? In truth, no. Different lenders will come with different rates, and those different rates can vary drastically from lender to lender. Do your research to determine which rate best suits you — It’ll be worth it in the end.
Whether you’re looking to buy your first home or you’ve gone through this process before and are determined to do it better this time around, turn to the experts at LemonBrew to discuss mortgage services and find the perfect home loan for your budget. No matter what the mortgage interest rates are today, LemonBrew is your best option for finding a home. Get pre-qualified today!