One of the most important factors to consider when applying for a mortgage is the interest rate that you’ll be charged. Your rate will have a direct impact on your monthly mortgage payments, as well as how much you’ll end up spending on your mortgage overall.
For this reason, it’s helpful to understand home mortgage rates and the factors that affect them, including the following.
Inflation refers to the increase in the price level of an economy over a certain time period. As the general price level increases, every unit of currency is able to purchase fewer goods and services.
This upward movement of prices as a result of inflation reflects the state of the overall economy and is a crucial factor for mortgage lenders, since inflation weakens the purchasing power of dollars. Lenders must keep interest rates at a level that is enough so that their returns allow them to realize a profit.
For instance, if the home mortgage rate today is 4% but the annual inflation level is 2%, the return on a mortgage when it comes to the purchasing power of the dollars the mortgage lender gets in return will be 2%. For this reason, mortgage lenders always keep tabs on the inflation rate and make adjustments to their rates as necessary.
The condition of the economy will impact home mortgage rates. Certain indicators dictate how well the economy is growing, such as the employment rate, which will, in turn, impact home mortgage interest rates.
A healthy economy that’s growing at a healthy rate will typically come with higher wages, more jobs, and great consumer spending. And with increased consumer spending comes an increased demand for mortgages.
This is a good thing for the economy of a nation. That said, home mortgage interest rates in this situation will typically increase, which will make homebuying more expensive.
The opposite is also true: a sluggish economy where wages are stagnant and consumer spending is weak means the demand for mortgages will also lag. In turn, home mortgage rates will likely stall.
Real Estate Market Conditions
The temperature of the housing market is another important factor that influences home mortgage rates. A weak market is usually characterized by lower demand for housing from buyers. With a drop in demand for housing also comes a decline in demand for mortgages. In this case, home mortgage interest rates are pushed downward.
On the other hand, a hot housing market that sees great demand for housing will help to push rates upward, as long as all other economic factors align. These conditions impact the levels that mortgage lenders set their mortgage rates.
Your Credit Score
While you may be unable to control what the economy or local housing market is doing, you do have control over other factors that could have an effect on your home mortgage rate. One important factor is your credit score.
Generally speaking, borrowers with a higher credit score can often get a lower interest rate on their mortgages than borrowers with a lower credit score. Mortgage lenders use credit scores as one way to assess a person’s ability to maintain a mortgage.
Lower scores mean the consumer likely has a past of poor financial management, including late or missed bill payments. In this case, the borrower will be considered a higher risk to the lender, who will charge a higher interest rate in order to offset this risk.
Higher scores, on the other hand, usually mean that the borrower has been able to successfully manage their finances, including paying their bills on time. These lower-risk borrowers will then be rewarded with a lower home mortgage interest rate from their lender.
Before you apply for a home loan, consider pulling your credit report, which will identify your credit score and any other pertinent information that’s affecting it. If you notice any details that are noted in error, it’s important to have them investigated and rectified right away, as they could be negatively affecting your credit score.
If your credit score is a little on the low end, take steps to improve it by doing the following:
- Pay all bills on time and in full
- Don’t spend any more than 30% of your credit card limit
- Don’t open too many credit accounts within a short time span
- Don’t close any old credit accounts, even if you don’t use them
The location of the home you wish to buy will also have some effect on the type of home mortgage rate you’re given by your lender. Depending on exactly what state or city you’re buying in, your lender may offer you a slightly different rate.
The home mortgage rate differs among various states for a few reasons. For instance, mortgage default risk plays a role, which refers to the share of borrowers who fail to pay back their mortgages. Early repayment risk is also a factor, which involves the number of borrowers who sell or refinance before the lender is able to see a profit. Further, state laws may also affect a mortgage lender’s ability to foreclose.
Mortgage Loan Amount
The price of the home and the loan you need to take out to finance the property will impact the type of home mortgage rate your lender charges you. Loans that are very large are considered riskier compared to smaller loans, as there’s a much larger amount of money that needs to be paid back.
Further, the loan amount as it relates to the price of the home matters. More specifically, the higher your loan-to-value ratio (LTV), the riskier you’ll be in the eyes of your lender.
That’s because the lender is putting more money towards the purchase price of the home than you are with your down payment. So, an LTV of 95% will be considered riskier compared to an LTV of 80%.
Generally speaking, a larger down payment usually translates into a lower interest rate. That’s because mortgage lenders view borrowers as less of a risk when the borrower has more of a stake in the property.
The higher your down payment, the more of a risk you’re taking, and the less risk the lender is assuming. As a reward, lenders will offer lower interest rates because they are not taking on as much risk.
Overall, the larger the down payment, the lower the cost to borrow, especially if you can snag a lower home mortgage rate.
The term of your mortgage refers to the amount of time you have before your mortgage is due for full repayment. So, if you have a 30-year term, that means you have 30 years to pay off what you owe, including interest.
Shorter-term mortgages often have lower interest rates and lower costs overall, but monthly mortgage payments are higher. For longer-term loans, mortgage rates are typically higher, but these mortgages allow borrowers to lock in their interest rates and payments for a long period of time, making budgeting for the long haul a bit easier.
For instance, as of this writing, the current mortgage interest rate for a 30-year fixed-rate mortgage is currently 4.67%, while the rate for a 15-year fixed-rate mortgage is 3.83%.
Mortgage Rate Type
When you take out a mortgage, your interest rate will be classified as one of two types: fixed or adjustable. With a fixed interest rate, your rate will not change over the term of your mortgage. That means that if rates are low today, you can lock in at that rate and keep it at that level for the duration of your mortgage.
Conversely, adjustable interest rates fluctuate over time, although they may have a fixed-rate period when their mortgage is first taken out. Once that fixed-rate period is over, the rate could go up or down each period.
Borrowers who are planning to move out of their home before the initial low-rate period expires may find adjustable-rate mortgages better for cost-savings. But those who plan to stick around in their homes for the long run may want to consider locking in their rate if the home mortgage rate today is very low.
Right now, the rate for a 30-year fixed-rate mortgage is currently 4.67%, as mentioned above. A 5/1 adjustable-rate mortgage rate, by comparison, is 3.83%.
There are many different mortgage types to choose from, and each one is best suited for different types of borrowers, such as the following:
- Conventional loans
- Jumbo loans
- FHA loans
- VA loans
The mortgage interest rates that come with each mortgage type may differ somewhat, which is why it’s important to do some homework on the various loan types and the rates that come with each before choosing which loan to apply for.
Ready To Buy a Home?
Are you curious about mortgages or need help navigating the current real estate market? If so, Sammamish Mortgage can help. We are a mortgage company serving borrowers in Washington, Oregon, Idaho, and Colorado since 1992. We currently offer many mortgage programs and financial services to buyers all over the Pacific Northwest. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website. Contact or call us today with any questions you have about home loans.