With everything going on in our current economy, our clients have been increasingly interested in what factors into their mortgage interest rate. In short, a lot of things factor into it, some within your control and others aren’t.
One thing that doesn’t directly affect mortgage interest rates is the federal funds rate. So when the federal fund rate dipped to 0% in March 2020, it didn’t make mortgage interest rates 0%.
Before we delve into what factors into your mortgage interest rate, we think it’s pertinent to point out that the most important thing to consider when choosing a loan is the total cost to borrow. You may find that one loan has a lower interest rate but you’d end up paying more through private mortgage insurance. That’s why we stress for our clients to look at the entire cost of the loan, not just one aspect. Now let’s talk about those interest rates!
Credit Score
Your credit score is one thing that factors into your interest rate. Generally, the higher your score, the lower your rate will be. This is the rule of thumb because a higher credit score indicates to lenders that you’re more likely to repay the loan, making it less risky for them. Click here to learn more about what factors into your credit score.
Down Payment
The amount of money you’re able to put down can be a major factor in your mortgage interest rate. The general rule of thumb is that the larger your down payment is, the lower your rate will be. Like your credit score, it all comes down to the amount of risk for your lender.
Loan Term
The loan term is the amount of time you have to repay your loan. Generally, shorter-term loans will have a lower rate and lower overall cost of the loan, but higher monthly payments.
Type of Interest Rate
There are two different types of interest rates, adjustable and fixed. With an adjustable-rate loan, your rate will be fixed for a certain time period, and then fluctuate with the market after that. With a fixed-rate loan, your interest rate won’t ever change. While your rate with an adjustable-rate loan may be lower initially, it will likely end up costing you more over the life of your loan, depending on the market.
Loan Type
There are many different types of loans – conventional, FHA, VA, USDA – just to name a few. Mortgage interest rates can vary depending on which loan you are applying for.
Loan Size
Believe it or not, the size of your loan plays a major factor in your mortgage interest rate. The smaller the loan, the higher the interest rate and vice versa.
Factors Outside of Your Control
Then, of course, there are factors that you have no control over. Interest rates are tied to the basic principles of supply and demand, meaning they are constantly changing based on inflation, economic growth, and the state of the housing market.
When it comes to mortgages, everyone’s situation is a little different. With so many items factoring into your mortgage interest rate, it’s impossible to know what your rate would be without speaking to a lender. Please don’t assume that just because your friend qualified for a certain rate, that you will too.
If you’re looking to buy a home in the next year, we’d love to speak with you! Give us a call at 402-991-5153 to discuss your loan options or to start the pre-approval process.
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