US lenders use the proposed mortgage repayment, based on the amount you’re looking to borrow as a percentage of your gross income. In most cases, a lender would want this repayment to be between 28%-36% of your overall gross income. Your credit score loan to value ratio, inflation, and more are involved — some of these are within your control and some are not. With awareness of these factors, you can feel more confident about getting a competitive interest rate when you choose a mortgage lender.
Mortgage Rate Factors You Can Control
There are some things you can control – at least partly:
- Credit score: Your credit score is a big factor in determining your creditworthiness, or how much of a risk you represent to the lender. A credit score of under 640 can mean a higher interest rate. The lowest mortgage rates go to borrowers with a score of 740 or above.
- Loan-to-value ratio: The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In real estate, the term is commonly used by banks and building societies to represent the ratio of the first mortgage line as a percentage of the total appraised value of a real property. Let’s say you make a $20,000 down payment on a $100,000 house. The mortgage will be $80,000. You are borrowing 80% of the home’s value, so your loan-to-value ratio is 80%. If your loan-to-value ratio is greater than 80%, it is considered high, and it puts the lender at greater risk. This would result in a higher mortgage rate.
- Home location: Many lenders offer slightly different interest rates depending on what state you live in. Different lending institutions can offer different loan products and rates. Regardless of whether you are looking to buy in a rural or urban area, talking to multiple lenders will help you understand all of the options available to you.
Mortgage Rate Factors You Cannot Control
You may be surprised at some of the things that affect your mortgage interest costs. If you are applying for a mortgage loan, you’ll want to shop around to find one offering the lowest interest rate and best terms. As you go into the process, it can be helpful to know some of the things that affect the interest rate you’ll be charged. Here are factors out of your control that could determine the interest rate you’ll pay to borrow for a home.
- The economy: You cannot control the economy. But you can keep tabs on national mortgage rates so you can try to be strategic about when to apply for a home loan. Waiting for rates to hit rock bottom doesn’t always work since it can be hard to predict when that will happen. But you probably want to avoid getting a loan when rates are near record highs.
- Inflation: As inflation increases, so does the price of everything, including mortgage rates. Inflation also reduces the demand that investors have for mortgage-backed bonds. As demand drops, the prices of mortgage-backed securities fall — this results in higher interest rates for all mortgage types.
- Job growth: Let’s first state the facts regarding our country’s wonderful week in labor data.
- Job openings are over 11,000,000.
- Jobless claims are under 200,000.
- The unemployment rate in America is 3.4%.
The job report in February of 2023 shows there is a clear pathway to lower rates. Mortgage rates fell aggressively down to 6.20%, putting us at more than 1% below the highs of 2022.
- Other indicators: Retail sales, home sales, housing starts, corporate earnings, and stock prices are also a few other things mortgage investors pay attention to.
- Federal reserve: Occasionally, the Federal reserve and mortgage rates move in opposite directions; this happened in December of 2022, when mortgage rates fell in response to declining inflation, even as the market correctly expected the Fed to raise the federal funds rate to restrain inflation even more. The Fed raised and cut short-term interest rates in reaction to broad movement in the economy. Mortgage rates rise and fall according to those same economic forces.
- Why do mortgage rates vary by lender?: Lenders have to consider the borrower’s financial situation, including their debt-to-income ratio, credit score, and down payment. To find the best mortgage rate, you need to find the right lender. Different lenders are willing to take different levels of risk, and they can all have a variety of different costs to consider. These can include lender overhead costs, closing costs, and mortgage bankers’ experience, among other factors.
While some factors determining mortgage rates are out of your control, you can strive for the lowest interest rate by improving your financial health and choosing the right lender. Lower your debt-to-income ratio, improve your credit score, and save money for a higher down payment.
Dan provides clients with years of proven experience and an abundance of financing options for their mortgages. His common sense approach and devotion to customer service is what sets him apart in the highly competitive mortgage industry. Dan prides himself on consistently delivering “referable services” to his clients, referral sources, and partners.