To finance your home, you’ll look for low-interest rates and agreeable terms. The amount a borrower will have to set aside for payments is determined on a case-to-case basis. But what influences mortgage interest rates’ fluctuation and why do the rates go up? 

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Mortgages are influenced by several factors. Understanding them is instrumental in making an intelligent decision about finances. Read on to see how you can improve mortgage interest rates to finance the home of your dreams. 

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What Factors Affect Mortgage Rates? 

The mortgage rate or interest rate is often a deciding factor. When exploring mortgage rates, lenders will chart rates on a per-borrower basis. Borrowers with exceptional credit scores are seen as low-risk, which results in a lowered interest rate. But what are the other factors to consider? 

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Economic Growth

As a rule of thumb, mortgage rates follow the same ebb and flow as economic growth. Indicators such as gross domestic product (GDP) and the unemployment rate influence mortgage rates. They tend to rise during periods of economic growth and low unemployment. The assumption is that employed people have more purchasing power, which leads to a greater demand for real estate.

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Conversely, a weakening economy experiences the opposite. As unemployment rates rise and wages decline, the demand for home loans dwindles and mortgage rates go down. 

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Inflation

With inflation comes the gradual increase in commodity price and the decline of an individual’s buying power. Creditors demand higher interest rates to compensate for the dollar’s waning buying power. Counter to this, low inflation rates also mean that mortgage rates will also wane.

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Credit Score

Lenders use credit scores to assess borrower risk. This includes the likelihood of a borrower paying their mortgage on time based on credit history. This includes loans, credit cards, and payment history. Borrowers with better credit scores receive lower interest rates. 

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State Of The Housing Market

In line with the law of supply and demand, more homes being built and sold on the housing market denote a greater demand for home loans. This results in increased mortgage rates. However, if there aren’t as many houses on the market or if more people opt to rent, mortgage rates decline. 

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The Bond Market 

Although it isn’t always the case, mortgage interest rates are related to the movements within the bond market. Investors invest more money when the economy is doing poorly since bonds are a lower-risk investment. The more people invest, the higher the bond yield becomes, which results in mortgage rates rising. 

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Many mortgage funds are pulled from deposits at banks and brokerages, and mortgage investors’ activities, which are a large part of the fluctuation. 

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Mortgage-Backed Securities

Mortgage-backed securities, or MBS, are bonds secured by the home and other real estate loans. They are created when several loans with comparable characteristics are pooled. In practice, a bank may group these loans and sell them to a federal government agency like Ginnie Mae or a government sponsored-enterprise like Freddie Mac.

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Mortgage investors do not buy an entire individual mortgage, and instead, buy shares of a group of similar mortgages and loans. 

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How Do Mortgage-Backed Securities Affect Mortgage Interest Rates? 

Mortgage rates depend on supply and demand. This same concept applies to how MBSs affect interest rates. Without government intervention like the Federal Reserve, mortgage investors can choose to buy MBSs or not, which affects the price of loans and their corresponding interest rate. 

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Federal Reserve

The Federal Reserve Bank plays a part in interest and mortgage rates due to its monetary policy. The Federal Reserve can raise or lower the federal fund’s rates, which are the interest rates that creditors may charge for short-term loans. In turn, long-term bank loans like mortgages are also influenced by the rise and fall of the federal fund rates. 

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Loan-Specific Details

When considering rates, the loan and its facets also influence your mortgage rates chart. Following are some things to examine: 

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Home Location

Depending on the state, many lenders will offer a different interest rates. Several online tools can provide a mortgage rate chart. 

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Home Price And Related Costs

The total that you’ll need to borrow is inclusive of your home price and closing costs minus the downpayment. In some cases, rates may also be influenced by insurance policies taken out on the home. Consider these factors when looking into creating a chart of mortgage rates. 

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Down Payment

Setting aside funds for a larger down payment results in a lower rate for mortgages. Lenders regard potential borrowers with a larger stake in their loans as lower risk. The size of the down payment can also affect rates in other ways, especially if you can’t pay at least 20 percent of the loan’s value. 

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Lenders may require borrowers who pay under 20 percent to purchase insurance. 

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Loan Term

Mortgage loan terms go for a 30-year fixed-rate or a 15-year fixed rate. Shorter-term loans have lower interest rates and lower costs, but the payments are higher. Longer loans like a 30-year fixed rate have higher interest rates that result in paying more over time, but this varies with each lender and borrower. 

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Loan Type

Creditors offer various loans to potential buyers. Loan types are one of the many reasons why your mortgage rates might go up or down, and each has requirements and qualifications. 

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One common loan is the conventional loan, which is not insured or guaranteed by the government. Next is a Federal Housing Administration (FHA) loan, which provides mortgage insurance to FHA-approved lenders. A USDA loan assists low-to-moderate income families, while VA loans benefit veterans. 

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Interest Rate Type

There are two interest rates: fixed and adjustable. Fixed rates remain constant throughout the loan, while adjustable rates fluctuate. Note that while adjustable rates may seem cheaper, they can vary with economic movement and growth. In practice, a 30-year loan of either interest rate doesn’t guarantee the same amount paid. 

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Things To Consider

Now that we’ve explored the factors, let's find simple ways to apply this knowledge. When the time comes that you take out a mortgage, there are a few things an individual borrower can consider when choosing terms. 

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Different Lenders, Different Mortgage Rates 

Mortgage rates vary depending on the creditor. Lenders have various tolerances and appetites for risk and costs associated with running their businesses. On top of this, they do not have unlimited loans. If a lender is at max capacity, they may raise their interest rates. The opposite is true when business is slow so more borrowers are inclined to apply. 

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Points And Interest Rates

As you canvas mortgage rates, you may find that some lenders offer “discount points” or lender credits that allow concessions to be made in the way the loan can be paid. Some allow borrowers to “pay points” up-front, which may result in a lower interest rate. On the other hand, lenders may also deal in lender credits so you pay less up-front but the interest rate increases. 

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However, not all lenders have a points system, and not all borrowers are interested. 

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Your Credit Score Makes a Difference

Borrowers are evaluated based on their FICO score, which grades consumers in a 300 to 850-point range. Higher scores indicate lower risk. Checking your credit score is considered best practice, but what is a good credit rating?

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• 800 or higher: Exceptional
• 740-799: Very good
• 670-739: Good
• 580-669: Fair
• 579 or lower: Poor

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While this is a good starting point, lenders often have prerequisites and qualifications for loans. The smallest difference in score may result in a change as large as .5%, thus every point matters. 

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Conclusion

Potential homeowners seek loans and mortgages to make their real estate dreams come true. However, mortgage interest rates can vary from lender to lender and based on how the economy. 

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Understanding what makes interest rates vary can make your goal more achievable. The economy, the bond market, the federal reserve, and the general supply and demand all play a part in how much you’ll pay. However, your credit score and details specific to your loan are crucial when canvassing for the best rates. 

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Wesley Mortgage can help you make the best decision for financing your home. Get in touch with us today.

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