You probably thought about interest rates if you have considered purchasing a home. Understanding interest rates, how they are determined, and why they are important to the housing market can help buyers and sellers make better financial decisions.
At Marimark Mortgage, we believe informed consumers are the best consumers, and our goal is to make sure our customers are informed and up to date on the current housing market trends and information. In addition, we help our clients determine their interest rates and help determine the best solution for their financial situation.
What is an Interest Rate?
An interest rate is a percentage of principal a lender charges a borrower for a particular asset, such as a home or land.
The mortgage rate is the interest rate set on a mortgage when purchasing a home. The mortgage lender determines these rates, and they vary from borrower to borrower based on numerous financial factors. When issuing a mortgage, lenders evaluate the level of risk since there is a possibility of the borrower defaulting on the loan.
When the lender considers the borrower a low risk, the borrower will usually receive a lower interest rate. However, if the lender considers the borrower high risk or if there is an increased possibility the borrower will default on the loan, the borrower will be charged a higher interest rate. The interest rate charged affects the overall cost of the mortgage and the monthly payment amount.
What Factors Determine Interest Rates?
Several key factors affect how interest rates are determined. While the daily fluctuation of interest rates is out of your control, some key factors are within your control. Here are some key factors that affect how interest rates are determined.
Factors Borrowers Can Control
The borrower’s credit score is critical in determining the interest rate charged on a mortgage and the loan size the borrower can obtain. A borrower with a high credit score is an indication that the borrower has an excellent financial history and is more likely to repay his debts.
Borrowers with higher credit scores receive lower interest rates than borrowers with lower credit scores.
Mortgage lenders want to know that you are invested in the home and typically do not finance 100% of the home without a 3rd party guarantee such as the VA. The more money a borrower has invested in the home, the less likely they are to default.
Related: Down Payment
The type of loan the borrower is applying for can influence the offered interest rate. Jumbo loans, for example, tend to have higher interest rates.
Factors Borrowers Cannot Control:
The Federal Reserve does not set home loan interest rates, but they influence them. The Federal Reserve controls the short-term interest rates by increasing or decreasing them based on the state of the economy. When the economy is struggling, the Federal Reserve lowers the interest rate, allowing banks to borrow money more easily to lend to homebuyers. Conversely, when the Federal Reserve tightens the money supply, they raise interest rates.
Interest rates and inflation typically track similarly. For example, when inflation increases, interest rates often increase to keep up with the value of the dollar. Likewise, if inflation decreases, interest rates typically decrease.
The Health of the Economy
The Fed uses interest rates to influence the health of the economy. For example, the Fed may raise rates to slow an overheated economy or lower rates to stimulate a languishing economy.
Ironically, when people are doing well financially because of a vibrant economy, interest rates may rise, causing the cost of homeownership to increase.
Interest Rates and the Housing Market
Interest rates will probably play an essential role in your decision-making process if you consider buying, selling, or refinancing your home.
Low interest rates tend to increase demand for homes, driving up prices, while high interest rates generally decrease demand resulting in lower home prices.
Interest rates affect the overall mortgage payment, and it is crucial for borrowers to factor in the housing market as a whole when deciding to buy or sell a home.
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. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.