When applying for a mortgage loan, it is beneficial for homeowners to understand the factors that affect mortgage rates. Some of these factors can be controlled by the homeowner, while others are out of their control.
Homeowners, therefore, who understand the interest rate factors within their control can positively affect their rate. Sometimes, small life changes can significantly lower the interest rate, thus lowering the monthly mortgage payment.
Personal Factors That Affect Mortgage Rates
Lenders adjust mortgage rates depending on the risk of the loan. The higher risk of the loan, the higher the mortgage rate.
When considering risks, mortgage lenders will determine the likelihood of homebuyers falling behind on payments. These factors will harm the lenders’ Return on Investment (ROI), resulting in a financial loss.
Lower mortgage rates are available to homebuyers who have credit scores of 740 and higher.
Borrowers with lower credit scores between 700 and 739 tend to have slightly higher mortgage rates.
With a credit score between 620 and 699, mortgage rates are even higher, and borrowers may find it challenging to get approved for a higher loan.
Credit scores below 620 leave borrowers with even higher interest rates and fewer options. At this level, most loans are insured or guaranteed by the government.
The loan-to-value ratio measures the mortgage amount to the home’s price or value.
The size of the down payment affects the loan-to-value ratio. For example, a larger down payment results in a smaller loan-to-value ratio, while a smaller down payment results in a larger loan-to-value ratio.
Many lenders consider a loan-to-value ratio of over 80% high risk, resulting in a higher mortgage rate along with the homebuyer paying for mortgage insurance.
Additional Factors that Determine Mortgage Rates
Some types of loans that can carry a higher mortgage rate are:
- Cash-out refinances.
- Adjustable-rate mortgages.
- Loans on manufactured homes.
- Investment properties.
These types of mortgages and property types are considered riskier, leading lenders to increase the interest rate.
Broader Economic Factors That Effect Mortgage Rates
Rates fluctuate daily based on the current and expected rate of inflation, unemployment, and several other economic factors.
The economy has a significant effect on mortgage rates.
Mortgage rates often increase when there is an increase in economic growth, higher inflation, and low unemployment rates. Conversely, mortgage rates tend to decrease when the economy slows down, inflation falls, and unemployment rates rise.
How Inflation Affects Mortgage Rates
Typically, rising inflation results in higher interest rates. When interest rates climb, the dollar can buy less. So, to compensate for the lost value, lenders will charge higher interest rates.
For several reasons, inflation has been low for the last decade. Globalization, technology, changes in the job market, and government policy have contributed to low inflation rates.
Low inflation has led to 30-year fixed-rate mortgages being generally below 5%. Indeed, over the last decade, the average was a historical low of 3.92%.
Job losses and high unemployment reduce the demand for homes, resulting in lenders offering better mortgage rates to stay competitive.
COVID-19 caused a significant disruption in the job market, leaving many without a job, resulting in a recession. Despite mortgage rates being low already, the recession forced them to drop even further.
Additional Factors That Effect Mortgage Rates
While inflation and employment are significant factors in determining mortgage rates, lenders paid attention to various economic trends. Some of the additional factors that affect mortgage rates are:
- Retail sales.
- Home sales.
- Housing inventory.
- Stock prices.
- Corporate earnings.
Does the Federal Reserve Set Mortgage Rates?
The Federal Reserve is not involved in setting mortgage rates. It does, however, set the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
These changes are a result of broader movements within the economy. Which, in part, influences mortgage interest rates set by lenders.
While mortgage rates and the Federal Reserve move independently, they generally move in the same direction.
Do All Lenders Have the Same Mortgage Rates?
Mortgage rates vary depending on the lender. Some lenders are more willing to take risks, while others have a lower appetite for risk. Additionally, different business structures and overhead costs can result in some lenders offering more attractive rates.
Also, the supply and demand of mortgage applications can influence interest rates. When lenders receive an abundance of mortgage applications, they may raise interest rates. Conversely, they may lower interest rates when they are not receiving enough applications.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.