NEW YORK, December 28, 2021 (Newswire.com) - iQuanti: Mortgage rates are determined by a number of factors, many of which depend on the circumstances of the individual borrower. There are also general trends in mortgage rates, such as the recent low mortgage rates that have inspired many homeowners to consider a mortgage refinance from Discover or another lender to take advantage of a lower rate and save money.
The General Principles
These are factors that are beyond an individual's control but are good to be aware of because they tend to influence mortgage rate trends across the entire market.
The main economic factors that tend to correlate with mortgage rates are unemployment, inflation, and economic growth. When unemployment is high, mortgage rates tend to go down. When inflation is high, or when the economy is growing quickly, mortgage rates tend to go up. Inflation can also be a significant factor that drives mortgage interest rates up. But when inflation is down, mortgage interest rates may also fall.
The Federal Reserve
The Federal Reserve is the central bank of the United States, and it does not directly set mortgage rates, but it does indirectly influence them. Its purpose is to regulate the economy by slowing inflation and encouraging job growth. The Fed primarily influences mortgage rates with its monetary policy, in other words how it buys and sells debt securities in the market. For example, the recent pandemic disrupted the treasury bond market and made the cost of borrowing money more expensive. The Fed responded by buying up treasury bonds so that the cost of borrowing money could be reduced.
This activity affects all variable interest rates, such as credit cards, HELOCs, and any sort of variable-interest-rate mortgages. Long-term rates for fixed-rate mortgages are generally not affected in the same way, but these are impacted by changes in the federal funds rate.
These factors are within someone's control to influence. Generally speaking, maintaining a healthy financial lifestyle and being able to pay down mortgages quickly will lead to lower interest rates.
Every lender may use slightly different criteria for determining how safe of a risk it is to lend someone a mortgage, but credit score is one of the most common. Most lenders will offer lower interest rates and multiple loan options to borrowers who have a high credit score, above 740. Interest rates may be slightly higher for those with credit scores between 700-739, higher still for those in the 620-699 range and the amount of the loans those borrowers have access to may also be lower than if they had higher credit scores. In these mid-low ranges, the mortgage may also come with mortgage insurance.
Those who have a credit score below 620 may find it difficult to secure a mortgage at all, but there are options available at this level that are usually guaranteed by the government.
The loan-to-value ratio compares the mortgage amount with the home's total value--it is essentially determined by the size of the down payment. For example, a down payment of $25,000 on a $100,000 home would mean the mortgage is $75,000 and the loan-to-value ratio is 75%. Loan-to-value ratios greater than 80% are considered high, and often result in a higher mortgage rate and require mortgage insurance.
The bottom line
Mortgage rates will always vary because every borrower has unique circumstances and every lender has different tolerances for risk. Borrowers who are aware of the general economic trends and practice sound financial discipline will better position themselves to anticipate good opportunities and to take advantage of lower interest rates.
Source: iQuanti, Inc.