If you are looking to buy a home, you need to understand the factors that determine mortgage rates. You also need to realize just how much those factors can affect you.
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Why do different lenders have different mortgage rates?
Many different factors affect mortgage rates, some of which are in your control and others that are not. Furthermore, mortgage rates vary from one lender to another, so it is always best to shop around before you decide to go with a lender. The reasons that different lenders provide varying mortgage rates are down to things like their individual overhead costs and their appetite for risk. For instance, if a lender reaches its capacity for the mortgage applications it can process, the lender could charge slightly higher rates to stop it from being overwhelmed. Likewise, if business is slow, the lender could charge slightly lower mortgage rates with the aim of drumming up more business.
Factors in Your Control That Determine Mortgage Rates
The key factors within your control that affect your mortgage rate are your credit score, your loan-to-value ratio, and the amount of your down payment. The higher your credit score is, the lower your mortgage rate can be. As for the loan-to-value ratio, it measures the mortgage in comparison to the value of the property. For instance, if you put down $20,000 on a house worth $100,000, the mortgage would be for $80,000, making your loan-to-value ratio 80%. You can change that value by putting down a higher down payment, and you can work on improving your credit score to secure a better mortgage rate. The length of the mortgage loan also makes a difference to your interest rate. For example, a thirty-year loan will typically have a higher interest rate than a fifteen-year one.
Factors Out of Your Control That Determine Mortgage Rates
The overall level of mortgage rates is determined by market forces, which you have no control over. The rates go up or down on a daily basis, based on things like the current rate of inflation and unemployment. When inflation is high, mortgage lenders set higher interest rates to compensate. And when employment is low, or there is a recession, mortgage rates are affected. In the US, while the Federal Reserve does not set mortgage rates, it does cut and raise short-term interest rates according to the economy’s broad movements, and mortgage rates will typically fall or rise in accordance.
How Mortgage Rates Affect You
You have already seen how both factors in and out of your control can affect the amount you will have to pay for your mortgage. But let us look at that in more real terms. For instance, 1% may not sound like a lot. But there is a big difference in how much you will pay depending on whether your mortgage rate is, say, 3.5% or 4.5%. That would mean when you buy a home worth $200,000 with a down payment of 20% and a thirty-year loan, if your rate is 3.5%, over a period of thirty years, your interest would come to $110,981, whereas if your rate is 4.5%, you would end up spending $148,332. Over thirty years, you would pay nearly $40,000 more. That is why getting a good mortgage rate is so crucial.
