What are mortgage rates? They are the interest rates tied to home mortgages, are affected by many different factors. Understanding what determines your mortgage rate is important when you begin the process of shopping for your next home loan. This will help you to know whether or not you are being offered a competitive mortgage deal.
One of the most obvious factors that affect your mortgage is your credit rating. The better your credit rating, the better your mortgage rate will be. Those with lower credit ratings will pay higher mortgage rates. This is the lender’s way of protecting itself from the danger that someone with a poor credit rating will default on a loan.
However, credit ratings are not the only things that affect mortgage rates. The Federal Reserve sets the base rate. This rate, known as the discount rate, is the rate at which the Federal Reserve will loan money to banks. Your mortgage rate will be higher than the federal interest rate, because the bank is looking to make money when you borrow from them. When the “Fed” cuts interest rates, the base mortgage rate also drops.
Because of the involvement of the Federal Reserve, the stock market actually affects interest rates as well. When people start becoming tentative or cautious in the markets, the Fed often lowers the interest rate to help encourage more buying. On the other hand, when inflation in the markets becomes obvious, the Fed may raise the rate to help control inflation.
The government and your credit score are not the only deciding factors when it comes to mortgage rates. The length of the term of your mortgage, the type of mortgage you choose, your debt to income ratio, and any points you pay upfront for the mortgage can all have an affect on mortgage rates. The best way to ensure that you get a good rate, however, is to keep an eye on the economy and your credit score, and apply for your loan when both of these are pointing towards low mortgage rates.
Comments on this entry are closed.