The mortgage rate is the interest rate you pay on a mortgage as a home buyer. Essentially, you are financing the purchase. As with other types of loans, many factors determine mortgage rates in the United States. Understanding these factors will help your family make informed decisions when you get one.
Two categories of factors
The factors affecting mortgage rates roughly divide into two categories; those you can control and those you cannot. You can change or improve the factors you can control to get a better rate, but there is nothing to do about the others. This also applies to second mortgage rates and refinancing. Let’s look first at what you can control.
1. Mortgage rates factors you control
The most obvious one is here is your credit score. So, that is a good place to start.
Your credit score helps lenders determine how much of a risk you are. People with higher credit scores are seen as presenting a lower risk. For this reason, they typically receive lower mortgage rates and have many more lenders and financial products to choose from compared to those with a low credit score.
Those who have a credit score of at least 740 have the best rates, followed by those in the 700 to 739 range, and so on. Those with credit scores of 620 or less can only borrow from specific lenders who charge very high interest rates. In many cases, they are forced to turn to loans guaranteed or insured by the government.
The loan-to-value ratio compares the mortgage’s size to the family home’s value. Let’s say you would like to buy a $250,000 house and can put down $50,000.
You would need to borrow $200,000, which is 80% of the home’s value. In this case, your loan-to-value ratio is 80%.
By adjusting the down payment, you can alter this ratio, and thus the money you need to borrow and pay back. A bigger down payment decreases the loan-to-value ratio, with the reverse being true.
A 20% downpayment that leads to an 80% loan-to-value ratio balances the lender’s risks and a borrower’s ability to repay. If the ratio is higher, meaning the buyer borrows more, there is an increased risk, and the mortgage rate will be higher.
2. Factors beyond your control
Unfortunately, some factors aren’t ones within your hands. The economy is an example of this.
Economic indicators are a significant determinant of mortgage rates and are out of your control. For example, no one person can determine how well the economy is doing or inflation, factors that weigh heavily on the rates lenders provide.
Mortgage rates tend to increase if the economy is growing fast, there is high inflation and low unemployment rates. The reason is that lenders want to control how much money they lend out when many people can borrow money in a fast-growing economy and low unemployment rates, as there is a high demand for mortgages and loans.
Additionally, high inflation means money loses buying power. So, lenders want more compensation to cushion themselves in the future.
Other economic factors that affect mortgage rates include home sales, stock prices, corporate earnings, and retail sales.
Talk with a mortgage lender about rates and factors
Even after understanding the factors, it is better to talk to lenders to see the rate they will provide. Talk to the best mortgage lenders available in Florida to find out their lending rates and how to get a mortgage with them.
Numerous factors affect mortgage rates, some that your family can control and others that you cannot. It is also important to understand different lenders will provide different rates, so it is a good idea to talk to multiple lenders to compare rates before picking one.