(LoanSafe.org) –You generally can’t get something for nothing, and this is especially true when it comes to borrowing money. The interest rate associated with a home mortgage might seem overwhelming when there are commercials, billboards, and advertisements by lenders all promising the “lowest rate” and largest savings. The truth is that actual lenders don’t have a lot of say about general interest rates, especially when it comes to conventional home loans.
What Is Interest?
In the simplest of terms when it comes to mortgages and interest, an 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 your house. Adjustable rate mortgages (ARM) 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 contract. 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.
How Are Mortgage Interest Rates Determined?
In the United States, the 10-year Treasury bond yield is perhaps the best indicator of how high or low interest rates will move. Bonds are the investment back-up system in America. When the stock market is unfavorable or considered too risky, investors sometimes back away and tend to invest instead in bonds, which are considered to be safer investments. These bonds, also known as Intermediate Term Bonds, are backed by the United States which therefore reduces the risks for investors.
Conversely, when the stock is viewed as a favorable platform for investing, bonds tend to be ignored somewhat, which makes their prices fall in order to attract more investors. The relationship between the 10-year bond and interest rates is this:
• 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.
• Mortgage rates are influenced by the federal government.
• The inflation rate influences mortgage rates – the lower the risk and worry of inflation, generally the lower the rates will be.
• 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.
• Slower economies tend to have lower interest rates to encourage spending and investing.
• There is no exact formula that can predict future interest rates. However, 10-year bond is just used as a general guideline.
How Do I Impact My Interest Rate?
Even with all of these external influences, the interest rates for which you might qualify are also impacted by you.
• The lower the credit score you have, the harder it will be to find a lower interest rate.
• Larger down payments tend to fuel lower interest rates. This is because big down payments show you are less of a financial risk.
• Your employment history and stability, along with the actual numbers on the paycheck, will influence how much or how little you are considered to be a financial risk. Don’t take a new job for a lower pay just before you try to refinance.
• The number of years you want to carry the loan will influence the interest rate. In general, 15-year fixed rate loans have lower rates than those for 30-year fixed rate loans.
Make sure that when it comes to mortgage interest rates that you understand your own credit score and how you can influence that score. Be sure as well that you take the time to shop around. Consider “locking in” an interest rate that best fits all your needs. Being confident about your purchasing options will better aid to your financial decisions, especially if the markets are currently fluctuating.