Many factors affect and determine mortgage rates which is why mortgage rates may fluctuate daily. When shopping for a mortgage, borrowers place a strong emphasis on getting a low interest rate. We outline some factors that may be in or out of your control when locking-in a mortgage rate.
What Affects Mortgage Rates: Factors that are Out of Your Control
The economy has a reasonably significant impact on mortgage rate movements.
Supply and demand
The amount of money available to lend to borrowers determines supply and demand levels. Typically, when banks have more money to give (more supply), interest rates may be lower. On the contrary, when banks have less quantity, interest rates may be higher.
Inflation
Inflation occurs when the price of goods and services rise, which, in turn, decreases one’s purchasing power. Higher interest rates may compensate for the rising inflation levels.
The government
The U.S. Federal Reserve (the Fed) has a say in how interest rates are affected. The federal funds rate is the interest rate that banks charge one another for borrowing short-term funds. If the economy is slowing down, the Fed may lower interest rates to increase borrowing power. If the economy is growing too quickly, the Fed may raise interest rates to slow down borrowing.
What Affects Mortgage Rates: Factors that are In Your Control
Although you may have no control over economic factors, there are a handful of items you can focus on to ensure you can get the best mortgage rate.
Credit score
Your credit score represents your “creditworthiness.” Mortgage companies evaluate your credit score to determine your ability to meet your debt obligations. A high credit score may signify that you are more likely to repay your loan on time. More risk (a lower credit score) may produce a higher interest rate and vice versa.
Tip: Read more about how to improve your credit score before applying for a mortgage!
Down payment amount
As mentioned before, the higher risk may correlate with a higher interest rate. Therefore, you may get a lower interest rate with a higher down payment because there is less risk associated when you have more at stake in the property.
Tip: If you don’t have enough money saved for a down payment, you may benefit from a down payment gift!
Debt-to-Income Ratio
Your debt-to-income ratio is all of your monthly debt payments divided by your gross monthly income. It is vital to keep your DTI low during the process of obtaining a mortgage. If you have a higher DTI ratio, the mortgage underwriter may perceive you as a riskier borrower, leading to a slightly higher interest rate.
Occupancy Type
When you apply for a mortgage you disclose how you intend to use the property; Will it be your primary residence? Or will it be your second home or investment property. Typically, mortgage rates for primary residences are lower than those for second homes or investment properties as they are considered less risky.
How to Get the Lowest Mortgage Rate
To ensure you can get the lowest mortgage rate, focus on the factors you may personally control. If you have a low credit score, concentrate on improving your credit score for a few months before applying for a mortgage. Additionally, consider re-budgeting to allocate more money towards a down payment.
Why Work with GuardHill?
GuardHill works with numerous investors and lenders to compare mortgage rates and loan programs and determine which is best for your financial profile. We always strive to provide our clients with the lowest possible mortgage rate. Contact us for a free rate quote!
