Mortgage Interest Rates 101

There’s a lot of talk about mortgage interest rates these days. It’s on the news, it’s on the airwaves, and it’s in the newspapers. With all the conversation, we thought it was a good time to break down what interest rates even are. Welcome to our Mortgage Interest Rates 101 crash course, where we cover the ins and outs of something so significantly tied to the American Dream.

So, what is an Interest Rate? Well, interest rates are the costs of borrowing money. A borrower who takes on a loan will pay an additional percentage of that total, which is considered “interest”. It is not some arbitrary number or a punishment to the borrower. Instead, it is compensation for the lender who is taking on all the risk of extending the funds for the loan. For the astute, they will recognize that this number can be a sliding scale. And that is because the significance of risk will depend on the person who is doing the borrowing. The riskier the borrower, the higher the interest rate.

But we’re getting ahead of ourselves! Let’s talk about the things that go into interest rate considerations.

Market Factors That Contribute to Interest Rates

Mortgage interest rates are comprised of two buckets: Market Factors and Personal Factors. One of those items we have a hand in, and the other is simply beyond our control.

While Market Factors do influence these numbers, because we cannot control them, we won’t spend too much time focusing on them. But we would be remiss if we didn’t at least mention a few factors.

The Federal Reserve

Some folks may mistakenly think that the Federal Reserve sets mortgage rates. They are an influencer, not a decider. Short-term interest rates are controlled by the Fed. These rates are increased or decreased largely based on the economy’s state. And while they aren’t directly linked, when the Fed rate fluctuates, the mortgage prime rate tends to shortly follow.

Bond Market

Mortgage bonds are groups of mortgages sold in the bond market. When the demand is high for mortgage bonds, which is usually when the stock market is having a bad day, mortgage rates increase. Conversely, when the demand is low, mortgage rates tend to decrease.

Inflation and the Health of Economy

Unfortunately, mortgage rates, economy health, and inflation go hand-in-hand. It is safe to assume that when there is turmoil in the economy and/or with the stock market, mortgage rates will be impacted.

Personal Factors that Contribute to Interest Rates

The above are all real world scenarios that cast a bit of a ripple on the surface of mortgage rates. But much like the blowing wind, there is little we can personally do about these influences. It’s the personal factors where you are able to slightly turn the tide. Lenders will adjust mortgage rates based on how risky the loan is. When determining the risk, lenders take into consideration several factors. These

factors tell them how likely you are to default on payments. Let’s talk about what makes you a “great borrower” vs a “risky borrower”.

Credit Score

We know the drill…the higher the credit score, the less of a risk you’ll appear as a borrower. Those with 740 or higher are going to get the choicest mortgage rates. Someone with a higher credit score typically illustrates that they are a responsible borrower. They pay their bills in a timely fashion, the don’t over-extend themselves, and will likely make good on any loan. The higher the credit score, the better the mortgage rate available to you. Want to improve your credit score? Read this, this, and this to start on that path.

Down Payment

When you come to the table with a decent down payment, the more you’ll appear to be in a financially responsible place to cover your loan. The higher the down payment, the better the mortgage rate. Need down payment assistance? Learn about down payment assistance options available to you.

Loan-to-Value Ratio

In addition, the psychology of your down payment also comes into play with a little something called Loan-to-Value Ratio. When you put more money into a loan, the higher the investment you’ve made. The theory being that the more you’ve invested, the more likely you do what you need to do in order to pay off your debt. Not to mention the simple fact that…the more you put down, the less you need to borrow.

As stated, there are simply some things with Interest Rates that are beyond your reach. Those within your grasp are the few things that you can personally control to impact your mortgage rate. The lower the mortgage rate, the less you’ll pay monthly to pay back your loan.

Mortgage rates can vary from lender to lender, as the ceiling for risk is different depending on the lender’s approach. The good news for you is that we are skilled at helping people get the loan, and mortgage rate, that best works for them. Owning a piece of the American Dream is within your grasp. To hear how we’re helping our valued clients navigate the current tumultuous world of Mortgage Interest Rates, give us a call today. We’ll tell you what we’re doing every day to turn more and more of our community into homeowners. We would love to call you neighbor!