If you’re thinking about borrowing money to finance a new home, there’s a lot to think about. First, you need to take your financial picture into account, including your credit rating, debt, and in essence, your overall borrowing power. You also need to speak with a loan officer about what type of mortgage is right for your personal circumstances: 15- or 30-year, fixed- or adjustable-rate, and the specific requirements of the mortgage you are thinking of applying for. And then there is the big question: What do current mortgage interest rates look like, and what rate will your qualify for?
While most homebuyers realize that locking in a low interest rate is one of the most important facets of a mortgage since it greatly affects monthly payments, you might not be versed in all the ins and outs driving those rates. Here are a few factors that determine what sort of rate you might expect to lock in on your home loan:
1) Your Personal Risk. A risk premium is part of the mortgage package and put simply, is an assessment of how likely you are to default on your loan. If you have good credit, your risk premium will be lower than someone with poor credit. During times when loan defaults are prevalent, risk premiums are raised to compensate for the higher risk of default – and vice versa.
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2) Your Down Payment. Generally, a higher down payment means a lower interest rate on the life of the loan.
3) Economic Conditions. Lower interest rates can boost consumer spending in times of low economic growth. Conversely, a strong economy and low unemployment numbers can often mean higher interest rates.
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4) Supply and Demand. The housing market can affect rates as well. A high demand for homes can trigger a rise in interest rates.
5) Mortgage Terms and Types. Interest rates also vary according to the term of the loan (15-year, 30-year, or other term) and whether the loan is a fixed- or adjustable rate. With an adjustable-rate mortgage (ARM), you can expect to see a fluctuation in the interest rate once the initial period of the loan expires. Additionally, loans for amounts over the conforming loan limit determined by Fannie Mae and Freddie Mac will likely carry higher interest rates.
6) Federal Funds Rate. As determined by the Federal Reserve, the federal funds rate is a short-term interest rate that banks charge each other to borrow cash reserves. This rate is often considered an indicator of other interest rates, including the prime (base) interest rate set by lenders.
7) The Ten-Year Treasury Note. Lenders often base their interest rates on Ten-Year U.S. Treasury bonds. The yield on such a bond can be seen by lenders as an indicator of the direction in which long-term interest rates are headed, so a higher yield is associated with higher interest rates
8) Inflation. Fear of inflation can drive up interest rates.
Since every lender and every mortgage is different, it’s important to find a home loan that works best for you. Doing your research and understanding what types of interest rates are associated with the loans available to you will help you determine what kind of mortgage you are going to apply for when you seek that ever-important home loan.
