10 Mar

What Affects Your Mortgage Rate?

Fluctuating mortgage rates

Your mortgage rate depends on your financial portfolio and the home you are looking to purchase. Mortgage rates also reflect the U.S. housing market and global economic patterns, which is why they are constantly changing. Here are the things that affect mortgage rates:

  • Economy – The global financial picture affects all interest rates.
  • Lender Pipeline – The amount of business a lender is currently handling will affect their rates.
  • Location Property – State regulations can drive up lender costs or keep them down.
  • Home Use – Primary residence, vacation home, or rental?
  • Property Type – single, multi-family, condo, mobile, co-op, etc.
  • Loan-to-Value –Borrowing less (and putting more down) gives you a better rate.
  • Credit Score – Higher credit means lower interest rate terms.
  • Loan Features – Term, documentation, rate adjustment, interest-only payments, etc.
  • Points – Paying more upfront for “discount points” reduces the loan rate.
  • Loan Amounts – Very high or very small loan amounts will mean higher rates.

Can You Control Your Interest Rate?

Unfortunately, you can’t control a lot of factors that have an effect on your mortgage rate. Change in the interest-rate market is beyond our control, however, you should gain knowledge about what is typical. This way, you’ll have a sense of whether an interest rate quote you receive seems to be within the range of normal rates, or whether you should ask more questions and keep shopping around. The good news is that the variables you can control affect your interest rate the most.

What Factors Can You Control?

Property Type — Take into account the relative cost of financing when comparing homes. Most lenders offer different interest rates depending on the state you live in. Various lending institutions may offer diverse loan products and rates. Whether you’re looking to buy in a rural or urban region, talking to several lenders will help you understand all the choices that you have.

Loan-to-Value (LTV) — Putting more money down increases your chances of loan approval, reduces your loan fees and offers a lower mortgage insurance rate. In general, a bigger down payment means a lower interest rate, because when you have more stake in the property, lenders see a lower level of risk. If you can put 20% or more down comfortably, do that — you’ll usually get a lower interest rate.

If you can’t afford a 20% or more down payment, lenders will usually require you to buy mortgage insurance, also referred to as private mortgage insurance (PMI). Mortgage insurance covers the lender in case a borrower avoids paying their loan.

Credit Score – One factor that could impact your interest rate is your credit score. Consumers with higher credit scores typically get lower interest rates than those with lower credit scores. Lenders use your credit scores to determine how reliable you will be in your loan payments. Credit scores are determined using the details in your credit report that shows your credit history. If you have a low credit score, putting off buying a home and focusing on increasing your FICO score to obtain a lower rate might be worth it.

Loan Features – The loan term, or duration, is how long you are supposed to repay the loan. Short term loans generally have lower interest rates and lower overall costs but higher monthly payments. The specifics matter a lot. You can save a lot on interest by choosing a loan with a shorter fixed-rate duration or a loan with a 15-year amortization instead of a 30-year term. Use our mortgage loan calculator to see how much your monthly payments will be.

Points – If you have expendable cash on hand, you can negotiate a lower interest rate by spending more upfront. When you choose a fixed-rate mortgage and intend on owning the home after you have reached the break-even date, buying points to lower your rate will make sense.

Buying mortgage points when you buy a home can save you considerable money over the course of your loan. It’s important to understand how they’re functioning and how long it takes to make the extra upfront expense worthwhile.

Loan Amount —For your mortgage loan, the amount you’ll have to repay is the house price plus closing costs minus your down payment. Your closing costs and mortgage insurance can also be included in the amount of your mortgage loan, depending on your circumstances or form of a mortgage loan. Use our mortgage loan calculator to see how much your monthly payments will be.

If you’ve already started shopping for homes, you might have some idea of the home price range you’re hoping to buy. If you’re just getting started, real estate websites can help you gain a sense of the typical prices in the neighborhoods you’re looking for.

We know there’s nothing like the warmth and safety of home after a long day on the job. That’s why we make financing it as affordable as possible. If you’re looking to refinance your mortgage or apply for a new one, contact us at 303-458-6660 or lending@rmlefcu.org.