Almost everyone will need a loan to purchase or refinance a home. And yet not everyone is aware of the factors that go into one of the costliest parts of the loan: interest rates.
A variety of factors can influence what rate a buyer pays. To help our clients, we have provided a few of the most important below.
For much of US history a central bank has served as an important national tool to maintain stability in the banking community and the economy at large. Today’s Federal Reserve has a mandate under federal law to set the interest rates banks charge each other for overnight loans. This is called the prime rate.
Most lending uses the prime rate as a benchmark for rates they charge consumers. If rates move higher, this will push up rates on adjustable rate mortgages. Surprisingly, however, higher interest rates in some areas could push home purchase prices down due to the higher cost of borrowing.
Interest rates can change slightly from state to state, depending on the economic health and prospects of the state. Since some states have a higher foreclosure rate, this may be reflected in the average mortgage rates.
Some states with sound economies also have higher interest rates due to laws that make foreclosures more difficult.
This handy free tool from the federal government can help mortgage shoppers to get an idea of what to expect in any given state.
One of the main factors in the determination of an individual buyer’s interest rate is theircredit score. Credit ratings companies assess each individual in terms of their risk. This level of assigned risk can affect interest rates on mortgages, or even prevent the individual from securing either.
Three credit ratings companies determine scores using the FICO scale. FICO scores come from evaluations of the following areas:
• Payment history (35 percent)
• Debt burden (30 percent)
• Length of credit history (15 percent)
• Credit inquires and credit history length (each 10 percent)
Available credit compared to credit used is an important factor in determining creditworthiness. Loan brokers can often advise on how best to boost scores through paying off old collections and other tactics.
Individuals have some power over lowering their own interest rates beyond that of improving credit scores.
First, they can lower rates by reducing the perceived risk of the lender. Providing a larger down payment creates more equity in the property. Lenders see larger down payments as a way to reduce risk because buyers typically work harder to protect a larger investment, and there is less mortgage balance left to pay off. Those who cannot pay at least 20 percent upfront may need to purchase mortgage insurance to keep their risk level, and rates, low.
Another option that home buyers have is choosing between mortgage types. A fixed rate mortgage locks in the rate paid at the time of purchase. Adjustable rate mortgages typically less expensive than fixed rate options, but will also rise and fall along with the prime rate set by the Federal Reserve.
Often times home owners wish to take out loans on the equity they have earned as they pay off their original mortgage. Typically, they use these loans for home renovations, expansions, or other kinds of upgrades. These loans can also come in fixed or variable types as described above.
Contact Us today to learn more about mortgage shopping, and let Competitive Home Lending help you get the best mortgage rate.