Before shopping for mortgages, it is wise to learn about the factors influencing rates. Most lenders offer only the best rates to borrowers with exemplary credit scores. Securing the best mortgage rate reduces the borrower’s out-of-pocket costs over the life of their mortgage. With multiple factors impacting the mortgage rate, borrowers must educate themselves.
Key Factors Influencing Mortgage Rates
Before understanding your mortgage rates, it is important to explore the factors that come into play. Breaking down these factors makes them more relatable to the average borrower who is simply trying to get the best rate possible so home buying becomes more affordable.
Inflation
Inflation is the bane of the financial market. Inflation rates directly correlate with the current state of the economy. Economies in distress will lead to higher inflation rates, which impact prices on everything, including mortgages. Mortgage lenders constantly survey the current inflation rates so they can adjust mortgage rates accordingly.
Economic Growth Indicators
Economic growth brings higher wages and increased consumer spending because of increased economic confidence. Although increased income is good for the economy, increasing mortgage loan demands can fuel higher rates, making home purchases less affordable. After all, lenders are limited in the capital they can lend to borrowers. With a downswing in the economy, mortgage rates tend to decrease, making homeownership more affordable.
Federal Reserve
The Federal Reserve has a hand in how mortgage rates rise or fall. Although the Federal Reserve does not set mortgage rates, lenders look to Fed fund rates to determine them. Increases in the money supply generally lower rates, and decreases cause higher rates.
Housing Market
When the demand for homes decreases, or fewer new homes are built, mortgage rates begin to drop. Over the last few years, the market has seen a rise in renters versus homebuyers. Attention to the housing market can help buyers understand why mortgage rates rise and fall.
Ways to Secure a Lower Mortgage Rate
Securing a lower mortgage rate means reducing the overall cost of your loan. The higher the rate, the more buyers pay in interest. Beyond the above, borrowers can also reduce the mortgage rates they are offered by paying attention to the following:
Improve Your Credit Score
Higher credit scores equate to lower interest rates. Lenders see borrowers with higher scores as less risky and generally offer better mortgage rates. Homebuyers need to consider looking at their credit scores and making adjustments to pay off debts before seeking a mortgage loan.
Increase the Down Payment
While a 20% down payment helps borrowers avoid private mortgage insurance, it may not be enough to decrease the interest rate. Upping your down payment savings to 30% can decrease the interest rate and make the payments more affordable.
Shorten the Mortgage Terms
Borrowers can also lower their mortgage rates by shortening the terms. Typical mortgage terms are 15, 20, or 30 years. The shorter the term, the lower the interest rate.
Understanding Mortgage Rates Prepares Borrowers
Understanding mortgage rates helps prepare borrowers for seeking mortgage loans. Getting your finances in order and saving for a hefty downpayment can help reduce home purchase costs. Educating yourself and shopping for the best interest rates is worth the time and effort for borrowers who want to navigate the approval process with the odds in their favor.