Andrew Vaughey, Mortgage Interest Rates 101
Andrew Vaughey, Mortgage Interest Rates 101
Many things affect mortgage rates - which is why they fluctuate. So
it pays to understand a little about how mortgage interest rates are
generated. The more you know about the economic factors that change
rates, the more prepared you are to find the perfect home loan at an
interest rate that’s perfect for you as well.
Market Conditions When the Federal Reserve Board raises or lowers
rates, there is usually an impact on the rate you will get for your
fixed rate home loan, although it’s not as direct as it may seem. The
Federal Reserve adjusts federal funds rate, which is the rate at which
banks lend to each other. When federal funds rate decrease, we spend
more, which can actually increase inflation. Mortgage rates tend to be
longer-term rates that are affected by concerns about inflation, as
well as other economic indicators like job growth. So it’s more
accurate to say that mortgage rates are indirectly affected by the
Federal Reserve Board, and more directly affected by what happens every
day in active public markets. The market sets the interest rate, and
then a margin is added to the index to determine your final mortgage
interest rate.
Timing Since interest rates change daily, the longer a lender locks in
a rate, the higher the risk that the market will move against them.
Therefore, you pay more (in points) for a longer guarantee. If interest
rates appear to be on an upswing, it makes sense to lock in your rate.
If they are steadily dropping, it makes sense to float your interest
rate so that you can take advantage of a shorter lock-in period, saving
you money.
Points You can often receive a lower mortgage interest rate by paying
extra points - mortgage costs that are up-front rather than built into
the interest rate. Each point equals one percentage point of the total
amount of the loan. For example, one point on a $100,000 loan is the
equivalent of paying $1,000 to ensure you get a lower interest rate
that saves you money over the life of your loan.
Credit and Payment History A less-than-perfect track record may make
you seem like a high credit risk, which means you’d only be eligible
for higher mortgage interest rate loans. If you find yourself in this
position, don’t worry - we have loans that could still help you make
your dream a reality.
Credit and Payment History A less-than-perfect track record may make
you seem like a high credit risk, which means you’d only be eligible
for higher mortgage interest rate loans. If you find yourself in this
position, don’t worry - we have loans that could still help you make
your dream a reality. Learn more about Bad Credit Loans.
Debt-To-Income Ratio Your monthly debt obligations are calculated
against your current income. The higher the ratio, the higher the risk
which could mean a higher interest rate.
Loan-to-Value The loan-to-value is the amount you need to borrow versus
the value of the home you want to buy. The more equity you have or the
more money you give as a down payment decreases a lender’s risk, often
resulting in a lower rate for you.
Property Type Lender risk plays a big part in your rate. For instance,
a loan for a single-family home is less risky than one for a
multi-family home because there are fewer variables. The less risk, the
better the rate.
Occupancy If you plan on living in your new home, you will probably get
a better rate versus a loan on a rental unit, which carries more risk
for the lender.
Loan Amount The amount of money you borrow could affect the interest rate you get.
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