What Influences Mortgage Interest Rates?

Mortgage RateIf you are in the market for a house — or even if you just have friends that are — you have surely heard about interest rates everywhere you turn. Just a few months ago, these rates were at an all-time low but now they are picking up again, which begs the question: what’s influencing them? When you are looking to buy a house and are figuring out your budget, interest rates are always in mind, but we often consider them in terms of “what’s the lowest rate I can get?” rather than delving into what influences them. There are myriad factors that go into establishing not only the national interest rate but also what you specifically will need to pay. In today’s blog, Family Home Loan Texas explains the factors that influence mortgage interest rates and how they can affect you.

Big-Picture Factors

One of the largest factors that affect mortgage rate interest is the overall economy. Major signs that the economy is rising are the GDP and employment also going up. Because the economy is growing, it means that there is a higher demand for goods and services, which includes real estate. When the economy is doing well, people have more money to spend leading to something like a competition between borrowers. This is considered demand, and it causes interest rates to rise. On the flip side, when the economy is slowing down, interest rates tend to fall. For home loans, the more money available to be borrowed from lenders means that the demand is higher — there is less money to go around — and mortgage rates rise. Again, when there is more money to lend — and not a lot of people seeking a mortgage — interest rates drop. 

Lately in the news, the term “inflation” has been used more and more. Inflation is what happens when there is more money available than products available for purchase. This leads to the dollar losing value, meaning you have to spend more to get less. As you have likely surmised, this also causes mortgage rates to rise; because money’s purchasing power is dropping, lenders seek higher rates to compensate for the dollar’s decreasing value. 

The Federal Reserve also raises and lowers the rate that lenders charge one another. As it rises or falls, so do other rates. These can include credit card interest, interest on car payments, and yes: mortgage rates, as well. The Federal Reserve adjusts these rates based on other happenings in the national and even global economy. When there is instability — like we are currently seeing in Ukraine — there is a ripple effect that affects seemingly unrelated things in the United States economy. This can include other countries having to default on large loans that they took out in the United States.

The Factors That Affect You More Directly

While the above factors influence rates across the country, regardless of industry, there are also myriad elements that can directly affect the mortgage interest rate that you receive. One of the biggest things that will affect your mortgage rate is your credit score. The number reflects how confident a lender is — or should be — in your repaying your loan. When you have a higher credit score, the lender will be more comfortable lending to you at a lower rate. There is no set rule for what your interest rate will be given your score, but typically, a score over 700 will provide you with the best rate. The primary factors that influence this score are payment history, how much you currently owe, the length of your credit history, new credit, and types of credit. 

Similarly, the size of your down payment will also affect your interest rate. Again, lenders want to feel secure in your ability to repay the loan, so the more you put down, the less risk they feel. In the past, 20% was the magic number, but this isn’t really the case anymore. Sure, if you can afford to put that much down on a house, you will probably find a better interest rate and you won’t have to pay mortgage insurance. However, coming up with that much cash isn’t doable for most people, so do not fret if you can’t make such a large payment. There are various types of loans that require a smaller percentage down that still provide competitive interest rates. FHA Loans, for instance, are great for first-time buyers and exist to incentivize more homeownership. 

Finally, the type of home you’re buying can affect your mortgage interest rate. If you are buying a house to be your primary residence, you will likely receive the best rate. If you are buying a vacation home, on the other hand, you will have to pay more. Additionally, if you purchase a property to rent out, it becomes considered an investment property, which also comes with higher rates. 

Contact Us To Learn More About Mortgage Rates

We know that interest rates can be confusing, as they fluctuate so much, but we are here to help. Family Home Loan Texas was founded by loan originator and long-time mortgage professional Rob Bramer. Rob has helped clients secure the loans they need both locally and nationally and can help you get the loan you need to live life on your terms. Call 1-800-990-LEND (5363) to speak with Rob about a reverse mortgage loan and to receive a free, no-commitment consultation.