7 Mortgage Rate Factors to be Aware of
It’s no secret that there are many mortgage rate factors to be aware of when considering purchasing a new home. But what are they? Purchasing a home can be so complex that it might be difficult to understand the basics. But not to worry, we are here to help!
Here are 7 mortgage rate factors to be aware of when purchasing a new home.
- Housing market
- Inflation
- Your credit score and finances
- Home location
- Down payment
- Type of interest rate
- Origination costs
1. Housing market
The housing market is one of the most significant mortgage rate factors to be aware of. The housing market determines not only the cost of housing in your area but the interest rate of your mortgage. When the economy and housing market is booming, the rate of interest for mortgage loans increases as well. This is because the lenders only have a certain amount of capital to lend. So when the housing market is booming and the demand for lending is increased, so must the interest rates to reflect the demand. Inversely, when the housing market is at a low point the demand for lending decreases, and so do the mortgage interest rates.
2. Inflation
Inflation is another one of the most important mortgage rate factors to be aware of. Inflation affects the spending power of the dollar. If inflation goes up, the spending power of the dollar goes down. This means that the percent gained by lenders also decreases as the rate of inflation increases. Therefore, inflation is something that lenders have to account for when setting mortgage interest rates.
3. Your credit score and finances
Your credit score and financial situation are some of the most critical mortgage rate factors. Your credit score and financial situation indicate to a lender how reliable you are to return your payments on time and to completion. Therefore, the higher your credit score the lower your mortgage interest rate is likely to be. Alternatively, the lower your credit score the higher your mortgage interest rate is likely to be, or more difficult to secure. So it’s important to check your credit score before you attempt to procure a home loan because it might affect your mortgage rate.
4. Home location
Sometimes, the physical location of the home you want to purchase may be one of the mortgage rate factors to consider. For instance, if you want to purchase a home in the city, it will likely be more expensive, and that will be reflected in the mortgage interest as well. However, if you are considering a home in a rural area your mortgage interest will likely be lower.
5. Down payment
The amount of down payment you are able to put towards your home is one of the major mortgage rate factors to consider. It’s no secret that saving for a down payment for a home can be difficult. However, if you can put a larger down payment on your home, you might be able to secure a lower interest rate on your mortgage. Lenders see a lower level of risk when you put a larger personal stake in the property.
All of this reflects your loan-to-value ratio. For instance, let’s say you are interested in a $200,000 home. If you make a $40,000 down payment it will leave a mortgage of $160,00. This means that your loan-to-value ratio will be 80%. If you have a higher loan-to-value ratio than 80% it is considered high and at risk for a lender. However, if your loan-to-value ratio is less than 80% that might contribute to a lower mortgage rate factor.
6. Type of interest rate
When considering mortgage rate factors, you should not only consider the interest rate itself but the type of interest rate involved. For instance, are you considering a fixed or adjustable interest rate? A fixed interest rate might be higher in the short term. However, an adjustable interest rate might be lower short term but end up higher in the long run due to inflation. Be wary of adjustable interest rates. For most home buyers they are NOT the correct choice.
7. Origination costs
Mortgage rate factors are a product of more than just external factors, but internal factors as well. For example, a lender must incur origination costs for every loan. These costs can include fees associated with running a credit check, underwriting, a title search, and the many other steps a lender must take to process a loan. These costs must be factored into the mortgage rate to ensure they turn a profit.
Are you considering moving into a new home? Give Ruth Stultz a call to see how she can help! Ruth Stultz is a highly experienced realtor who understands Lake Conroe and Montgomery County better than anyone. When it comes to selling your current home or finding the perfect property with everything you want, Ruth knows exactly where to look. You can trust Ruth Stultz with buying and selling your home.
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