How Do Lenders Determine Mortgage Rates?
When it comes to home loans, there are usually three numbers that borrowers pay attention to. The first is the total amount of the mortgage, in order to make sure that the amount covers the cost of the home. The second is the amount they are going to pay each month, which affects how easily they’ll be able to make payments.
But the third, and arguably the most important, is the interest rate of the loan. This determines not only how much you pay each month, but how much you’re investing in the property in the long term. To show you how important interest rate is:
30 Year Mortgage, $250,000 Home Loan, 3.5% Interest Rate:
- $1,123 Monthly Payment
- $404,140 Total Cost of Loan
30 Year Mortgage, $250,000 Home Loan, 4.5% Interest Rate:
- $1,267 Monthly Payment
- $456,017 Total Cost of Loan
That 1% increase in the interest rate represents an increase of $52,000 spent on the mortgage during the course of the loan. Interest rate is very important.
But how do lenders determine interest rate?
Many different factors go into determining your interest rate. These including your personal risk profile, the type of loan, the current economy, and the federal government. Some of the factors include:
- Credit Score – Your credit score has a strong effect on your loan rate. The higher your FICO score, the better a loan you are likely to qualify for.
- Amount of the Loan – The total mortgage amount has a small effect on the interest rate. Homes under $100,000, and homes over $417,000 may have slightly higher interest rates than other loans.
- Down Payments – Higher down payments can help you receive a lower loan rate, because they indicate to the lender that you’re more personally invested in the property.
- Loan Term – The shorter term you have, the higher your rate is likely to be.
- Treasury – Finally, mortgage rates are also influenced in large part by the treasury. Every year, the treasury determines its interest rates, which determines how banks can borrow and lend money. This has a direct effect on the rate that lenders can provide you.
Those are several of the factors that go into determining your interest rate. But what makes the interest rate change over time? Mortgage interest rates change frequently due to issues that include:
- Bond Yields – Mortgages are a form of banking investment. Bond yields are another popular type of investment. When the bond yields go up, it becomes such a good investment that banks take money out of mortgages and invest it in bonds. This makes mortgages a worse investment, which increases the interest rate nationally.
- Economy – The economy has a direct effect on interest rates, and once again it’s related to investors. When the economy is strong, interest rates increase because investments are moved to other securities. When the economy is worse, the interest rates decrease, because people are more likely to invest in bonds.
- Supply/Demand – Although less common, the number of loans that people are taking out can occasionally affect interest rates as well. When there are more loans and fewer people investing in them, the interest rate may go up.
Mortgage interest rates are complicated and ever changing. The best way to truly understand these interest rates is to talk to a loan originator. Interest rates are still low, but they are starting to go up. Contact a loan originator at Open Mortgage to discuss your potential interest rate today.