Mortgage Rates and the Factors That Affect Them

Interest rates are a major concern for homeowners when looking to purchase or refinance a home. Not only do they affect how much you pay each month, but also the length of the loan. Knowing how your mortgage rate is determined will give you insight into which lender and terms best suit your requirements.

Your credit score and loan-to-value ratio are important factors lenders take into account when setting your mortgage rate. The higher your credit score, the lower your rate may likely be.

Your down payment amount and mortgage rate will both be determined by how much you borrow. A larger down payment means you owe less on your home and qualify for a smaller mortgage.

Local Real Estate Market Conditions
When the housing market is slow, mortgage lenders face greater difficulties maintaining a steady flow of business. Therefore, they may adjust their interest rates slightly in an effort to attract more clients and keep overhead expenses under wraps.

Strong Economic Growth
When the economy is doing well, more people are looking to buy homes and mortgage lenders have more funds available for lending out. Therefore, mortgage rates usually go up during economic booms and down during recessions.

Employment Rates
The unemployment rate is another factor that influences mortgage rates. When unemployment is high, lenders and banks face greater difficulty getting a steady flow of approved loans, leading to higher mortgage rates.

Inflation plays a significant role in setting mortgage rates, especially when it diminishes purchasing power of consumers and investors. Lenders – such as Fannie Mae and Freddie Mac who purchase mortgages from lenders – must make up for this loss in purchasing power by charging mortgage-holders higher interest rates than they otherwise would need to cover costs.

Comparing mortgage rates between multiple lenders is the best way to guarantee you’re getting the best rate for your needs and situation.

Your loan term will also influence your mortgage rate, as longer-term loans typically offer lower interest rates than shorter ones.

Inflation, the federal funds rate and the economy as a whole are factors that can have an impact on mortgage rates. When the Fed raises its benchmark interest rate, it could push up lending costs and cause mortgage rates to go up.

If the Federal Reserve reduces the federal funds rate, it could help bring down mortgage rates.

The level of unemployment can also have an effect on mortgage rates, as it creates a sense of insecurity and leads to decreased demand for mortgages.

Other elements that could influence your mortgage rate include the equity in your home, which could make it harder for you to be approved for a loan.

A larger down payment can help you lower the amount of your monthly mortgage payments and accumulate savings over time.