Understanding Mortgage Rates
Mortgage rates change on at least three times on a daily basis, and oftentimes those rates are determined by market, political, and economic factors far beyond your control. What you can do, however, is educate yourself on the factors that you do have influence over.
You're also encouraged to click the button below to take you to our free mortgage calculator to get a better idea of what your payments could look like on your next finance!
Things you Can't Control
Market Factors - 75% of US consumer debt is tied up in real estate loans and mortgages, and if something upsets that, we're in for a world of hurt. Mortgage rates are carefully balanced to ensure that we don't find ourselves in another 2008.
Political Factors - An emergency FED rate drop or executive order can cause rates to drop as quickly as a political disagreement between trade partners can cause them to go up. Unless you're elected president, don't anticipate being able to influence this too much.
Economic Factors - Rising inflation often leads to lenders increasing rates to ensure their profit margins are protected. The FED also has a large say in mortgage rates, as the FFR they influence sets the bar for investments (mortgage-backed securities included) across the market.
Things you Can Control
FICO Score - Credit scores are a quick way to compare your financial management skills with everyone else in the country. Higher credit scores usually indicate more experience managing personal finances and identify you as an ideal buyer. These folks usually get lower rates, as lenders try to incentivize them to become their clients.
Down Payment - Lenders take a lot of risk when they lend money to help you buy a home. Oftentimes, they'll ask for you to put down a little of your own money as a down payment to prove you've got some skin in the game. Putting more money down than the absolute minimum reassures the lender that you're in this to win it, and oftentimes comes with a rate discount.
Discount Points - In addition to increasing your down payment, you can also contribute money at closing directly toward "buying down" your interest rate. As a rule of thumb, for every 1% of the loan value you buy down, you can expect your interest rate to drop a quarter to a half percent!
Length and Term of Loan - Shorter loans mature faster, which means that the investor on the back end gets their money back sooner. These situations are often incentivized by lower rates. In fact, plenty of adjustable rate mortgages (ARMS), while definitely a riskier strategy in the long run, do come with competitively lower rates to make up for the added risk to the buyer.
Loan Type or Program - Different loans have different inherent risks to the lender. For example, a complete rehabilitation of a dilapidated home under a FHA 203k loan has more potential for failure than a VA loan secured by a new construction. Generally, the less complicated a loan is, the lower rates that you can expect it to attract.
Lender - Different lenders have different risk tolerances and minimum profit requirements. If your lender has a large, nationwide presence through aggressive marketing, or several expensive physical locations, chances are those costs will get passed along to their clients.
Pricing Incentive - Like your favorite gas station's 99c fountain drinks, lenders will oftentimes offer specials or discounts to draw in new business. These discounts usually translate over to credits that can be used to secure lower interest rates or cover closing costs or other tangible loan benefits.