Almost everyone will need a mortgage loan to purchase a home or refinance a mortgage. And yet, not everyone is aware of the factors that go into current mortgage rates. A variety of factors can influence the mortgage rates homebuyers pay. Here are a few of the most important factors that affect mortgage rates today.
The Federal Reserve Bank
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. Mortgage lenders uses the prime rate as a benchmark for the mortgage interest rates they charge consumers. Mortgages rates will move accordingly when the Federal Reserve adjusts the target rate. Surprisingly, mortgage interest rates in some areas could be lower than current mortgage rates due to targeted area incentives. Contact Us to find out about targeted areas that benefit from lower rates.
Home Location
Mortgage rates can change slightly from state to state. Since some states have a higher foreclosure rate, this may be reflected in their current mortgage rates. Some states with sound economies also have higher interest rates due to laws that make foreclosures more difficult. This free tool from the Consumer Federal Protection Bureau can help mortgage rate shoppers to get an idea of what to expect in any given state. Remember, wholesale mortgage rates are always lower than retail mortgage rates!
Credit Score
One of the main factors in the determination of an individual buyer’s mortgage interest rate is their credit score. Credit ratings companies assess each individual in terms of their risk. This level of assigned risk can affect mortgage interest rates. Contact Us if you want to discuss credit score requirements for home loans, or if you want an idea of current mortgage rates based on your credit score.
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. Our in-house loan officers can access tools such as credit simulators and advise on how best to boost scores and other tactics.
Terms and Conditions of the Mortgage Loan
Homebuyers have some power over lowering their own home loan rates beyond improving credit scores. First, they can lower mortgage rates by reducing the loan-to-value (LTV) ratio, thus reducing the mortgage lender's perceived risk. Providing a larger down payment creates more equity in the property. Increasing the borrower's home equity can increase the borrower's commitment to make on-time mortgage payments. Those who cannot pay at least 20 percent upfront may need to purchase mortgage insurance (MI) to keep their lender's risk level low. Talk to our loan officer about mortgage rates on low down payment mortgage loans.
Another option that homebuyers have is choosing between mortgage types. A fixed rate mortgage locks in the mortgage rate paid at the time of purchase. Adjustable rate mortgages (ARM) can start with a lower mortgage rate but can adjusted based on its mortgage rate index. Contact Us if you need help deciding between a fixed mortgage rate or an ARM.
Home Equity Loans
Often times homeowners wish to take out mortgage loans on the equity they have earned as they pay off their original mortgage. Typically, they use these home equity loans for home renovations, expansions, or other kinds of upgrades. These loans can also come in fixed mortgage rate or variable mortgage rate types as described above.
