Mortgage interest rates are one of the most important factors to borrowers when it comes to obtaining a mortgage. The interest rate is the amount of extra money you agree to pay a lender for the privilege of that lender loaning you the money you need to buy or refinance your house.
Getting a low interest rate that is affordable is key to a successful mortgage transaction. It is important that you know that a small increase or decrease of .25% (quarter percent) could mean the difference between saving or paying thousands of dollars every year and a lot more over the life of the loan.
There are several factors that will determine the interest rate you will get on your loan. Factors such as the financial markets, Treasury bonds, economy, type of mortgage, your credit score, down payment, employment history and stability. Below you will find the key components that affect mortgage rates.
The mortgage rate that is offered to a borrower is also affected by his credit score. The lower his credit score, the higher the mortgage rate will be offered and vice versa.
When a borrower has great credit, a decent down payment, good real estate history and steady employment ,then they can obtain the best mortgage rates on the market. These people are called “prime borrowers” and every lender in the country would love to extend credit to them with very favorable terms.
Borrowers with poor credit, low down payments, poor real estate histories and unsteady employment will often pay significantly higher rates with tougher loan terms. These borrowers are called subprime. Loans to this sector of borrowers may be hard to find, but there are good loans that they may qualify for such as FHA insured mortgages.
FHA will lend to borrowers with a very low credit score down to 500-580, or without any credit history at all. They are also available to people who have gone through bankruptcy, foreclosure, and/or short sale in the past 1-3 years. Rates are also at similar levels to those loans for borrowers with prime credit, but there are other qualifying factors that must be met to qualify.
Type of Mortgage
The size and type of the loan will also play a big factor in your interest rate.
Fixed-rate mortgages are the most common type of home loan, and even though the interest rate remains the same year after year for the life of the loan, the interest payment amount slowly decreases while the amount of money applied to the actual loan amount slowly and proportionately increases.
Adjustable rate mortgages (ARM) will normally have lower rates that fixed rate loans, but they are sometimes a bit more risky. ARM loans have an initial period of time where the interest rate remains the same. However, once this period expires the rate will be fluctuate annually based on the economy. This can be a risky for many people.
Jumbo mortgages will have a higher interest than conventional loans because the loan amount is higher and riskier for the bank. Jumbo loans in some areas of the country are typically any loan amount above approximately $417,000.
Refinance rates are usually a bit higher than purchase rates, while rates for FHA, VA, and USDA loans are often lower than conventional. Loan Officers determine what program will provide you the most benefit which will depend on your credit profile, how much you’re putting down, and whether or not you’re going to be occupying the property.
Another factor that can affect the mortgage rate that is offered is the amount of down payment that a buyer is willing to put down. A higher down payment will usually mean that a borrower represents less risk and therefore, a lower mortgage rate is offered.
You will find that mortgage rates often change from lender to lender. Sometimes direct lenders offer better rates and sometimes you will find a better rate with a mortgage broker who can shop your loan around to find you the best deal. That is why it is important that you shop lenders and compare rates.
Inflation is a major issue for mortgage rates. Individuals who want to apply for a mortgage during a period of high inflation fears are going to encounter higher mortgage rates. Slower economies tend to have lower interest rates to encourage spending and investing. Lower mortgage loans are available during periods of low inflation.
Although there are several different factors that may determine the way interest rates fluctuate, it is said the movement of the 10-year Treasury bond is one of the best indicators to help predict when interest rates will rise and fall. However, rates are not directly tied to bonds, but they definitely influence one another.
The Department of Treasury establishes the initial interest rate based on international conditions. In the United States, the 10-year Treasury bond yield is perhaps the best indicator of how high or low interest rates will move.
When bond prices fall and investors are turning to the stock market, interest rates tend to climb. At what time when bond prices increase due to increased demand, interest rates tend to fall. Other factors such as the Consumer Price Index, the Gross Domestic Product, current trends in home sales, and employment rates all can impact interest rates.
Mortgage Rates in the Near Future
Mortgage rates are currently still at all-time lows and have been for the last several years. However, they are expected to go higher in 2016 and into 2017. Fannie Mae has predicted rates to be above 4% in 2016 and climb to 4.2% in 2017. Freddie Mac and the Mortgage Bankers Association (MBA) have similar forecasts for 2016, However, both agencies have said that rates may go as high as 5.1% in 2017.
In a recent survey by BankRate, more than 4-in-10 Americans (41%) admit they’re concerned about rising interest rates in 2016. Americans are most worried about how rising interest rates might affect their personal finance situation (18%) and what consequences may be for the economy/stock market (16%) in a rising rate environment.
If you are concerned about rising rates and or would like a live rate quote and/or to discuss your mortgage options, please call me, Erik Sandstrom, with Caliber Home Loans at 1-800-779-4547; or email me at Erik.Sandstrom@CaliberHomeLoans.com.
You can also search for rates online using the widget below.