As the first month of 2021 comes to a close, it's clear that low inventory, high demand, and lower than low rates will lead to new residential construction this year.
Summary: The interest rate that comes with your mortgage will directly impact how much you can expect to pay over the life of your loan. In this article, we’ll discuss some of the major factors that influence mortgage rates, and what that means as far as how much your home loan will cost you over its term.
If you are considering a home purchase in Washington State sometime in 2020, one of the more important factors to consider is the interest rate that you can get. The reason? Your rate will have a direct impact on how much you pay overall for your mortgage.
Your goal is to score the lowest rate possible, but there are many things that influence the rate you can get, including the following.
1. Your Credit Score
Your credit score is instrumental in your ability to secure a mortgage in WA. But not only that, but it’s also a critical element that comes into play as far as the interest rate you will be charged on your mortgage is concerned.
Credit scores are important factors that lenders use when they determine whether or not to approve loan applications, no matter what the loans are for, and this includes mortgages. If your credit score is on the lower end of the scale, you could be faced with a higher interest rate on your mortgage. That means your loan amount will be more expensive by the end of the term because more will be paid out in interest.
On the other hand, a higher credit score will usually translate into a lower interest rate, which equates to a lower overall loan amount by the end of the term. That’s because there’s less risk associated with a borrower with a higher score, and mortgage lenders will reward less less-risky borrowers with a lower rate.
If your credit score is lower than it could or should be, consider taking some time to give it a boost before you apply for a mortgage in WA. You can do this by:
- Paying all your bills on time
- Keeping your credit card balances low
- Making more than minimum credit card payments
- Not applying for too many credit lines or loans within a short window frame
- Keeping old credit accounts open
2. Down Payment Amount
Generally speaking, a low down payment amount usually means a higher interest rate, while a higher down payment amount means a lower rate. That’s because lenders perceive a higher down payment amount as a lower risk.
By putting more money down towards your Washington State home purchase upfront, you’ll have more equity in the property right off the bat, which also means you’ll have a greater stake in the home.
A larger down payment also means a lower loan amount, which is also seen as less of a risk for lenders. By increasing your down payment amount and lowering your loan amount, you can effectively get your loan-to-value ratio (LTV) within a healthy range that lenders typically like to see.
Your LTV essentially is a measure of the loan amount relative to the value of the property. The lower this ratio is, the better, and a bigger down payment can get you there. In turn, your lender may be more willing to give you a lower interest rate on your VA mortgage.
3. Type of Interest Rate
You can get one of two different types of interest rates on your WA mortgage: fixed-rate and adjustable-rate. A fixed-rate mortgage comes with an interest rate that remains unchanged over the loan term. That means your payments will be more predictable as the rate will not change after you lock it in, no matter what happens to rates in the open market. As long as you lock in a rate with a fixed-rate mortgage, that’s the rate you’ll pay until the term ends or until you either refinance the mortgage or sell your Washington State home.
On the other hand, adjustable-rate mortgages come with rates that may fluctuate over various intervals throughout the mortgage term. While these types of home loans usually come with an initial fixed-rate period with rates that are usually lower than that of fixed-rate mortgages, the rate will typically go up or down at each interval based on the market. So, if your rate is not locked down, it could fluctuate throughout the mortgage term.
Depending on the current market, either type of interest rate may work best. For example, if rates are expected to increase in the near future and you like the idea of a stable rate, a fixed-rate mortgage may be best. But if rates are expected to decrease in the near future or you expect to sell your home before the initial fixed-rate period ends, an adjustable-rate mortgage may work well for you.
4. Mortgage Program Type
There are a few different loan programs available in Seattle, Kirkland, and Bellevue that may come with different interest rates. These include:
Different lenders will offer different mortgage products. Some may offer only one or a couple, while others may offer all types. Regardless, the type of loan program you choose may come with different interest rates, and each loan program comes with different eligibility requirements.
Officials anticipate rising inflation in 2020 in Washington State and the country as a whole, which could have an impact on many things, including interest rates. More specifically, inflation is forecasted to rise to a range of around 2.5 percent in 2020.
With an increase in inflation comes a steady increase in commodity and home prices. Inflation inevitably weakens spending power, and mortgage lenders typically must keep interest rates at a certain level to overcome this spending weakness as a result of inflation. This will help to make sure that lenders still profit from decent returns. Lenders keep tabs on the rate of inflation and adjust their rates appropriately to reflect inflation, and if inflation increases, we could see a modest increase in rates in 2020.
6. Economic Growth in WA and the Nation as a Whole
Certain economic growth indicators can impact mortgage rates, such as the employment rate and the gross domestic product (GDP). If these indicators point to a stronger economy, income levels are typically expected to be higher, and in turn, consumer spending will be stronger. And if consumer sentiment is positive, this could mean that more consumers may be out looking for a mortgage in WA.
But along with an increased demand for mortgages also comes the potential for interest rates to increase. Lenders only have a certain amount of capital that they can lend out, and to compensate for this heightened demand, they may boost rates.
The opposite is also true: a weaker economy usually means lower consumer spending, and therefore a weaker demand for mortgage shopping. As such, this puts downward pressure on interest rates that lenders offer.
According to recent numbers, the unemployment rate is down, jobs and wages are up, and housing starts have increased, pointing to a modestly stranger economy. In turn, this could stimulate more consumer spending and could drive interest rates up.
If you’re considering buying a house in Washington State in 2020, be sure to speak with a seasoned lender before you start the process, and Sammamish Mortgage is always on hand to help.
Related: Real Estate Outlook in WA State
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Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region that includes Idaho, Colorado, and Oregon. We offer a wide variety of mortgage programs and products with flexible qualification criteria. Please contact us if you have mortgage-related questions.