Earlier this week, the Federal Reserve announced a rise in interest rates, causing many to wonder how that would affect their financial situations. But what are all the factors that affect your mortage interest rates?
There are really four key factors that will influence rates: The market, your financial situation, the type of loan, and the loan structure.
Mortgage Backed Security prices directly impact interest rates. Mortgage backed securities or mortgage bonds are a market just like the stock market. So, when economic news affects these mortgage bond prices, home loan rates are directly influenced. One of the biggest influencers of this market is inflation. Inflation or even expectations of inflation will negatively impact mortgage bond prices and ultimately increase rates.
- Income – Your income gives you the ability to make your monthly mortgage payments. Generally, lenders require applicants to have a two-year stable employment history. Applicants who have been at their job for a shorter period of time should be in the same field.
- Savings – Your savings enable you to pay for the upfront costs associated with purchasing a home. These include the down payment, closing costs and cash reserves.
- Debts – The amount of debt you have will impact your debt to income ratio. Debt payments consist of car payments, student loans, alimony, required payments on installment loans and required payments on credit cards. They do not include rent, utility bills, mortgage payments for loans being paid off, or payments on credit card balances that you pay in full at the end of the month. Lenders look at debt to income ratios to determine how much home you can buy.
- Credit and Credit Score – If you want to be eligible for the best mortgage rates, you will need to maintain a credit score of 760 to 850. Not only will this excellent score motivate the lender to lower your rates to get you as a customer, you will have more choices about which mortgages are available to you. Your overall payment history on the debts you have can also impact your ability to qualify for certain types of loans, which can affect your interest rate.
Type of Loan & Loan Structure
- Loan Type – The type of loan will impact the rate you can expect. There are many types of loans. Conventional, FHA, VA, USDA, and Jumbo loans can all have different rates.
- Occupancy – The best mortgage rates are typically offered if you are purchasing a property that is intended to be occupied as your primary residence. Rates for second homes and investment properties are typically higher.
- Duration – The duration of the loan can affect mortgage rates. A shorter loan period will usually equate to a lower mortgage rate and a longer loan will typically have higher rates.
- Down Payment – A larger down payment can impact interest rates. Putting more down will decrease the risk for a lender and can improve your interest rate. If you put less than twenty percent down, certain types of loans require mortgage insurance and this can also impact the interest rates available.
- Discount Points – In order to get a lower rate some clients choose to pay discount points. Basically, discount points are percentages of the loan amount paid in cash at closing in order to lower a rate.
- Lock Term – The length of time you need to lock in your rate can impact your rate. Typically, longer term rates are more expensive.
Of course, every financial situation is different, so to get an understanding of what kind of rate you can expect, reach out to a Service First Loan Officer today!