How Are Mortgage Rates Determined?
Many factors affect and determine mortgage rates. Some factors, such as the economy, are out of your control. Some other factors, such as your financial profile, maybe more in your control.
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 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 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.
Your credit score represents your “creditworthiness.” Lenders 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.
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.
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.
Overall, interest rates on mortgages may vary depending on economic factors and your financial health. It’s essential to speak with your mortgage advisor to better understand what loan program is right for you and to determine how much house you can afford.