What Drives Mortgage Rates?
Several economic and personal factors affect how lenders determine interest rates. The economic factors involve the current economy and market rates, while the personal factors are within your control.
Here's a breakdown of the economic and personal factors that drive mortgage rates:
Various economic factors have a significant impact on the mortgage rates today. They include inflation, the health of the economy, Constant Maturity Treasury, Secured Overnight Finance Rate, bond market, and the Federal Reserve, as discussed below:
The Federal Reserve
One misconception in the mortgage lending market is that the Federal Reserve sets interest rates. The truth is that the Fed only influences short-term mortgage rates. It does this by decreasing or increasing them based on the present state of the economy.
To regulate the money supply in the US economy, the Fed manages short-term mortgage rates. These rates apply to lenders that borrow funds and originate them to consumers. It usually lowers these rates if the economy takes a hit.
The Constant Maturity Treasury (CMT) Rate
CMT rates are calculated by factoring in the average yields of other US Treasury securities adjusted for set periods. They are the basis of interest calculations on adjustable-rate mortgages. If the CMT rate reduces, all mortgages tied to it also have lower rates.
The Bond Market
While the prime rates of mortgages are linked to the ten-year US Treasury note, they also have ties to the bond market. This market controls the sale of mortgage bonds (also known as mortgage-backed securities). High demand for mortgage bonds increases mortgage rates and vice versa.
The Secured Overnight Finance Rate (SOFR)
As an interest rate designed around the overnight borrowing costs for banks, the SOFR helps lenders to determine the base interest rate of a mortgage depending on the mortgage type. It gained traction in the mortgage market after replacing the London Interbank Offer Rate (whose reign ended in 2021).
Inflation and mortgage rates are directly proportional to each other. High inflation in the market results in high mortgage interest rates, to be at par with the dollar value. However, the prime interest rates on a mortgage may fluctuate or remain the same in low inflation periods.
The Health Of The Economy
The health and outlook of the economy primarily affect the performance of mortgage rates. A stable economy means that spending is high and unemployment rates are low, leading to an increase in interest rates.
Consequently, when the economy isn't stable, there will be alarming unemployment rates, low oil demand, and low spending, causing mortgage rates to drop.
Personal Factors Affect Mortgage Rates
Besides economic factors, many personal factors can affect the interest rate you get on a mortgage. This is before the lender factors in costs like origination fees. Below are the personal factors you can control when you want to take a mortgage.
With a high credit score, mortgage lenders will consider you less mortgage risk. It'll mean you pay your pending bills on time without extending your credit. Your credit will also reveal that you have a low risk of defaulting on a home loan.
A high credit score will likely improve your chances of getting a favorable interest rate on a mortgage. On the other hand, the lender will adjust the rate significantly if your credit score is low. This is because a lower credit score suggests to lenders that you are at a high risk of defaulting on a loan.
Loan-To-Value Ratio (LTV)
Your loan-to-value ratio is your down payment amount to the loan amount. Making a small down payment on a home will increase your LTV, putting a higher risk on the lender. This will mean you are less incentivized to keep making mortgage payments even in a financial crisis.
A high LTV attracts higher interest rates to reduce the risk of default on the lender. Consequently, a lower LTV can get you a lower interest rate since you'll have a sizeable down payment.
Lenders set the down payment requirement to help determine whether you are invested in purchasing a home. In this case, putting down less than 20 percent on the property may get you a higher interest rate and mortgage insurance requirement.
It also suggests that you won't be borrowing 100 percent of the finances and are less likely to default on the home loan.
Your lender will base the interest rate on your occupancy status (whether the home will be an investment, a primary residence property, or a second home). A primary residence will attract the lowest interest rates since it's where you live. You'll be more incentivized to make payments on time to avoid losing the home.
If you want to use the mortgage to buy an investment property or second home but have financial issues, the loan will come with a higher interest rate. This is because your financial issues may increase the likelihood of defaulting on the loan, putting the mortgage lender at risk. The high rates help compensate lenders for this risk.
Why the Mortgage Rates Today are Where They Are
As you consider buying a property mortgage, you may wonder what's going on with the interest rates. Well, mortgage rates are moved by economic and personal factors discussed above. But there's more to them than these factors.
It's important to note that mortgage money comes from various sources, including brokerages and bank deposits. Most of it also comes from investors in the form of capital markets. In this case, capital markets signify investors' interest in buying different debt instruments, particularly bonds.
Sellers of bonds have to actively compete with each other to earn their money from investors. They usually offer various debt instruments that differ in return and risk structures over specific periods. The offerings tend to compete with other similar investments, including foreign bonds, corporate bonds, and US Treasuries.
These investors are people like you who want low debt payments (especially on your mortgage) and high returns on investments. They tend to buy lots of low-yielding bonds (including mortgages).
The demand for investors in a particular investment largely contributes to the dynamics of the market yields. This is because investors have lots of options when it comes to investing their money. There are many sellers with different products trying to compete for investor funding.
If the demand falls, sellers must make specific changes to attract investors. The best way they do this is to increase interest rates.
It's not easy to attract investors by increasing interest rates. Investors expect the highest returns on particular investments, while homeowners or homebuyers want the lowest possible mortgage rate. This leaves the mortgage market makers stuck between setting the rates high enough to appeal to investors and low enough to draw more borrowers in.
Ways to Get a Better Rate on Your Mortgage
While weighing your options for your next home loan, try to set yourself up as an excellent borrower to pass the loan application and get the lowest rate possible.
The three pillars that can help improve your chances of getting a better rate include your income, assets, and credit score. Follow these seven steps when looking to secure a competitive rate.
Improve Your Credit Score
A low credit score won't prevent you from getting approved for a home loan, but it can get you more costly borrowing terms. And since credit score helps determine your borrowing risk, lenders use it as a benchmark to decide your ability to repay a debt. The higher the score, the lower your likelihood of defaulting.
A credit score of 740 and above can get you the best mortgage rates in the market. It'll give lenders more confidence in your ability to make on-time payments.
Paying your bills on time and eliminating or paying down your credit card balances will help improve your credit score. If you have to carry a balance on your credit, it should be less than 20 to 30 percent of your remaining credit limit.
Maintain a Record of Employment
Lenders will be more interested in giving you a mortgage if you can prove at least two years of steady earnings and employment from the same employer. Your lender will also expect you to offer proof of any commissions or bonuses you earned. You should have pay stubs 30 days before you consider taking the mortgage and W-2s for at least two years.
It can be difficult for a lender to qualify you for the loan if your income comes from multiple part-time jobs or you are self-employed. In the case of self-employment, lenders may ask for tax returns and P&L statements to gauge your financial stability.
If you recently joined the workforce after taking some time away or are a graduate, lenders may consider you for the loan if you have a reliable formal job offer. However, the offer must include what the job will pay you. The same case will apply if you have a new job offer but are currently employed.
Raise a Substantial Down Payment
You can obtain a mortgage at a lower rate with a sizeable down payment amount. This means you have adequate liquid cash to make a 20 percent down payment on a property.
A lender can only allow you to make a low down payment (below 20 percent) if you agree to pay private mortgage insurance. Private mortgage insurance is usually capped at 0.05 percent to 1 percent of the loan amount and can be waived if you pay down the loan to less than 80 percent of the property's value.
Review Your Debt-to-Income (DTI) Ratio
DTI measures your total debt compared to the amount you earn every month. A lower DTI ratio makes you more appealing to lenders since it implies that you can afford to make loan payments without stretching your current budget. On the other hand, a higher DTI will suggest that a lot of income is directed towards repaying the loan, making it harder to afford more debt.
Avoid taking a home loan that will take more than 28 percent of your monthly earnings as loan payments. Also, your DTI should always be below 36 percent to improve your chances of qualifying for a mortgage.
The maximum DTI ratio needed for FHA home loans is 43 percent, while the one needed for conventional home loans is 45 percent. However, you can get qualified for a mortgage with a high DTI if you have significant savings.
Opt for a 15-year Fixed-Rate Mortgage
A 15-year fixed-rate mortgage will be the best option if you have a good cash flow and want to repay the loan sooner. It will also be an ideal refinancing term for your existing mortgage. Most 15-year fixed rate mortgages have an interest of 4.870 percent, which is highly competitive.
It's always a good idea not to accept the first mortgage rate you are quoted. Instead, shop beyond your credit union or bank for additional rate quotes. Through comparison shopping, getting a mortgage with terms that fit your current financial situation is more manageable.
Lock in Your Mortgage Rate
Since interest rates on mortgage rates tend to fluctuate, you have to lock in a rate sooner on your loan. If you wait a little longer to close your loan, your competitive rate on the loan will change.
The goal is to ask your mortgage lender to lock in the rate after signing the home purchase agreement and securing the loan. Though the service attracts an extra fee, it's worth paying, especially in a competitive mortgage rate environment.
5 Great Activities for Children in Brevard County, Florida
Brevard County is a great hub for fun, children-friendly indoor and outdoor activities located in the east-central part of the Sunshine State. There are lots of amusement parks, nature parks, and local zoos to explore with your kids, as discussed below:
The Brevard Zoo is the perfect attraction for children and families as a world-renowned zoo. You'll find a water play area (including a toddler water park) and a petting zone for small children. Other children-friendly activities in the zoo include paddle boating, train rides, and ziplining.
Fun Town is famous for being the largest indoor center for family fun. It offers a safe and fun environment featuring bounce houses, mini bowling areas, a tot play area, and an indoor toddler playground that your kids can explore.
Andretti Thrill Park
The Andretti Thrill Park combines a kids arcade with a family entertainment amusement park. You'll find batting cages, a mini golf area, go-kart racing, and a playground on the outside. The inside features a laser tag arena, a mini bowling area, and a large arcade.
Kennedy Space Center
The Kennedy Space Center is a fantastic place to take your kids if they enjoy space exploration. It features the US Astronaut Hall of Fame, Rocket Garden, and Astronaut Memorial for your entertainment and learning. Your kids also get to meet veteran astronauts and experience a shuttle launch.
Urban Air Adventure Park Melbourne
As a family-friendly indoor playground, the Urban Air Adventure Park Melbourne features a tube playground, battle beam, obstacle courses, climbing walls, video game play, and trampolines for ultimate enjoyment.
You kids can also enjoy playing apex trampolines, runway tumbling, dodgeball, and slam dunk basketball.
In a nutshell, certain personal and economic factors determine a mortgage's interest rate, which affects your monthly payments' affordability.
While you have no control over the economic factors, you can do something about the personal qualifying factors lenders consider when qualifying you for a mortgage.
Good luck shopping for a competitive mortgage rate in Brevard County, Florida, with the tips discussed in this guide.