Several Factors Determine Mortgage Rates
One of the most important is the Federal Reserve's target for the federal funds rate. It is the rate at which banks lend money to each other overnight, and it directly affects the rates banks charge consumers for loans. Other factors that can influence mortgage rates include the yield on the 10-year Treasury note, inflation, and the economy's overall health.
Banks and other financial institutions set mortgage rates, determined by the market conditions. The most common type of mortgage is a 30-year fixed-rate mortgage, which means that the interest rate will not change for the life of the loan.
Mortgage Bonds Is Where The Real Game Is
Interest rates are driven by the movement in mortgage-backed securities – bonds that are financed by mortgage loans. As you can imagine, when the risk of default is high, the rate of return for investors in mortgage-backed securities is high.
On the other hand, when the market views mortgage-backed securities as a safe investment, the rate of return falls. The rate of return on a mortgage bond is dependent on the quality of the underlying mortgage loans. If the loans are of high quality, the rate of return will be low, and vice versa. When the rate of return is low, investors typically flock to these securities, which pushes bond prices up and yields down.
At the same time, banks and other lenders try to borrow at low-interest rates and charge consumers at higher interest rates to make up for the difference. The same logic applies to savings deposits, which pay a higher interest rate when the interest rate paid on bonds is high.
A Relationship Between Stocks and Bonds
Another factor affecting mortgage interest rates is how investment dollars flow between equities or stocks to fixed income or mortgage bonds. For example, in times of market turmoil such as a recession, investment dollars flow out of stocks and into bonds, which drives interest rates down and vice versa.
How Mortgage Rates Affect Your Monthly Payments
Mortgage rates affect your monthly payments by dictating the interest you will pay on your loan. A higher mortgage rate means you will pay more interest on your loan and vice versa. Your monthly payment is also affected by the term of your loan or how long you have to pay back the loan.
A shorter loan term will result in higher monthly payments, but you will pay less interest. The type of mortgage also affects your monthly payments. A fixed-rate mortgage has the same interest rate for the life of the loan. In contrast, an adjustable-rate mortgage (ARM) has an initial lower interest rate that can adjust periodically throughout the life of the loan.
How To Get A Competitive Mortgage Rate
When you're ready to buy a home, one of the first things you need to do is get pre-approved for a mortgage. Many factors determine the mortgage rate, including your credit score, down payment, loan type, etc. While you can't control all of these factors, there are some things you can do to get the best mortgage rate possible.
Getting the best mortgage rate starts with having the best credit score possible. You can order a free credit report from each of the three major credit bureaus once a year. Check your credit report for any errors and dispute them if necessary. Paying your bills on time and keeping your credit utilization low will also help improve your credit score.
The amount of your down payment will also affect the interest charged. The higher the down payment, the less interest you'll pay. The mortgage lender is taking less risk when you make a large down payment, so they charge lower rates to compensate. The lower your down payment, the higher the interest rate the mortgage provider can charge.
You Can Buy Your Interest Rate Down
Mortgage rates aren't cut and dry. While economic conditions and your ﬁnances play a role, keep in mind that you can also inﬂuence your rate by paying points, we'll be sure to factor this in when comparing your loan options.
Points, which may also be referred to as "origination fees" is a method to manipulate your interest rate. They are considered to be pre-paid interest. In other words you are willing to pay a certain amount of interest up front to buy your interest rate down and lower your monthly mortgage payment. One point is the equivalent to 1% of the total loan amount.
If you have any questions, feel free to contact us at 425-320-9679.