When it comes time to buy a new house, you know that you need to get your credit in shape to get the lowest possible rate. You know that paying off debt and coming up with a big down payment. can lead to a better rate. However, these aren’t the only factors influencing your mortgage interest rate.
This article explains how the state of the economy influences mortgage interest rates.
1. Credit Scores
Your credit score directly impacts the interest rate offered on your mortgage. If your credit score is between 760 and 850, you can expect to receive the best interest rate offers when shopping for a home loan. If your credit score is below 620, you are considered a “subprime” borrower and offered significantly higher mortgage interest rates than potential borrowers with better credit ratings. If your credit score has dipped below 500, then you’re unlikely to qualify for a mortgage at all.
- Economic Growth
High levels of economic growth generate higher incomes, more investment and increased consumer spending. The expectations of economic stability drive prospective homeowners into the mortgage market. The increased demand for mortgages generates upward pressure on rates in reaction to the limited supply of loan able funds. The opposite is true during periods of slower economic growth in which spending, investment and income decrease, drawing potential homeowners away from the mortgage market. Consequently, the decrease in demand for mortgage borrowing places downward pressure on mortgage rates.
- Risk-based pricing.
Risk is one of the primary factors that affect your mortgage rate. Banking and lending are risky businesses, because there’s always a chance the borrower will fail to repay his or her debt obligation down the road. This is referred to as “default.”
Riskier borrowers are charged higher interest rates than less risky borrowers. Learn more about risk–based pricing. This is one of the primary factors that will influence your mortgage rate.
- The type of home you’re buying.
Different types of properties have different risk levels associated with them, based on the historical likelihood of default. So, by extension, the type of property you are buying can also affect your mortgage rate.
Generally speaking, single-family homes that are purchased as a primary residence pose the lowest risk of default. Properties purchased as vacation or second homes tend to have a higher default rate. Lenders often charge higher rates for “riskier” properties, not to mention imposing stricter underwriting guidelines.
- The Federal Reserve
The Federal Reserve and other government agencies are at least partially responsible for mortgage interest rates, according to the “U.S. News and World Report.” When the Federal Reserve purchases long-term U.S. Treasury “securities” or debts to help the economy, sometimes mortgage interest rates decline. For example, despite the global economic crisis that was active as of 2010, the best available long-term mortgage interest rates were at a nearly record low of approximately 4.5 percent.
Taking control of mortgage rate factors
If you’re a control freak, the list of factors above may look daunting. That’s because you can only control a few of them!
The good news is that the variables you can control have the most impact on your rate. They are:
- Property type — if deciding between two homes, incorporate the relative cost of financing when comparing them
- Loan-to-value (LTV) — putting more money down improves your chances of loan approval, cuts your loan fees and gets you a lower mortgage insurance rate (if applicable)
- Credit score — it may be worth it to put off buying a home and concentrating on raising your FICO
- Loan features — choosing a loan with a shorter fixed-rate period, or one with a 15-year amortisation instead of a 30-year term can save you a lot in interest
- Points — you can buy a lower interest rate by paying more upfront, and sometimes this is a good strategy
- Loan amount — it might be smarter to get a conforming first mortgage with a purchase-money second mortgage than taking out a more-expensive jumbo home loan