Buying a home with a mortgage remains one of the most common ways to acquire a home. This is mainly due to the fact that homes cost a significant amount of money that often proves arduous to raise. The overall cost of purchasing a house through a mortgage depends largely on the mortgage interest rates. While borrowers seek the lowest rates possible, lenders try to cover themselves from various risks by charging high interest rates. Eventually, the borrowers who get to enjoy the lowest rates are those with impressive credit scores and untainted credit histories.
As much as the credit history or financial health of a borrower impacts the interest rates that they get for their mortgage, other factors play a role as well. Some of these include macroeconomic factors and government fiscal policies.
Here are some of the factors that influence your mortgage interest rates:
1. Conditions of the housing market
Like any other market, the housing market is subject to supply and demand factors. Mortgage interest rates are affected by the trends and conditions in the market. When fewer homes are being built or are available for resale, there is a decline in the purchase of houses, thereby reducing the demand for mortgages and their interest rates. An increase in consumers who prefer to rent rather than buy houses is a recent trend that is driving mortgage interest rates down. The shifts in availability and demand for homes among consumers certainly have an impact on the levels at which lenders set interest rates.
2. Economic growth levels
Higher economic growth levels, as indicated by high employment rates and expanding gross domestic product (GDP), influence mortgage interest rates. When economic growth levels are high, there is a lot of income among consumers to be spent, leading to a large number of consumers spending, which includes more people applying for mortgage loans to buy homes. The rise in demand for mortgage drives mortgage interest rates upwards, since lenders have limited amounts to loan among many borrowers. The inverse is also true during low economic growth times.
3. Credit score
While some of the factors that affect the interest rate for your mortgage are out of your control, your credit score is within your sphere of influence. Generally, those with higher credit scores receive loans at lower interest rates than people with lower scores. Credit scores are computed using the information in your credit report. This information includes things like your payment history, the various cards you have, outstanding loans, and your credit history.
It is always advisable to obtain your credit reports long before you start your mortgage application process and to scrutinize them. Should there be any errors in the reports or commissions, you should dispute them with the credit bureaus. The issues in the reports can negatively affect your score and deny you the opportunity to get a mortgage at a good rate and with favorable terms. Also, the disputing and resolution processes may take longer, thus the need to take action long before you submit your mortgage application.
But what if your score is low and you are planning on taking out a mortgage in the future? Well, all is not lost, as you can start rebuilding your score by ensuring you are up to date on your payments, and by increasing your credit limit to improve your debt ratio. You can also engage experts to help you rebuild your score, who you can find at https://www.boostcredit101.com/. In addition to getting good interest rates and terms, a good score is crucial for many other things, so make sure you work on building yours.
4. Loan amount and home price
The total loan amount that you are seeking, which by and large is influenced by the price of your home, will affect your mortgage interest rate. The amount you borrow is usually equal to the total price of the home plus closing costs, minus the down payment that you will pay. In the event you want to take out a comparatively small loan, you may be expected to pay higher rates, as the lender will seek to make a reasonable profit off of the relatively small loan. On the other hand, your lender is likely to charge you higher interest rates for bigger amounts due to the risk of giving out so much money. The secret is to find the sweet spot between the smaller amounts and the huge amounts, where the interest rate will not be so high.
5. Expected down payment
You can significantly influence the interest rate you will be charged by the amount you are willing to pay towards the down payment for the home you are buying. The idea is that the higher the down payment, the less of a risk on the lender, and the more likely they will be willing to compromise on the interest rate. Most of the time, if you are able and willing to pay about 20% of the value, you will most likely be eligible for a lower rate. However, you should shop around for the best rates from different lenders, as rates vary significantly and you may be able to influence the interest rate that you are charged by paying as low as 5% or 10% of the home price.
6. Loan type
You most likely qualify for various mortgage loan types that come with different interest rates. The conventional 15-year and 30-year mortgage loans normally require the homeowner to pay a 20% deposit. However, Federal Housing Administration (FHA) loans typically require the buyer to pay a down payment as low as 3.5%, and at the same time offer better interest rates compared to conventional ones. On a different note, FHA loans may require the homeowner to take out private mortgage insurance that is meant to protect the lender from the risk of the buyer defaulting on payments. As is evident from this illustration, different loan types can have significantly different interest rates.
Inflation, or the movement of prices, has a huge impact on the economy and is no different for mortgage lenders, as it influences the purchasing power of money over time, and most of the time erodes it. Mortgage lenders are keen on the inflation rate, and monitor it to adjust their interest rates accordingly.
8. Federal Reserve monetary policy
The Federal Reserve Bank of any country observes a certain monetary policy at any given time, and this has a significant impact on the economy as well as the interest rates, which include mortgage rates. The actions of the Federal Reserve Bank in determining federal funds and the money supply—whether upward or downward—affects the interest rates charged to the consumers. Overall, an increase in money supply lowers interest rates, while a reduction in supply drives the rates higher.
9. Loan term
The length of your repayment period is the loan term. Most of time, loans with a shorter repayment duration have lower interest rates and lower total costs, but attract bigger monthly payments. However, this will depend on the specific terms and conditions of a mortgage.
10. Interest rate type
There are two types of interest rates—fixed and adjustable. As the name suggests, fixed interest rates do not vary over time. On the other hand, adjustable rates could be fixed for a given period, and after that they may rise or drop each period depending on market factors. So, you could start with a lower interest rate with an adjustable-rate loan as compared to a fixed-rate loan, but this rate could go up by a substantial percentage later on.