What Drives Mortgage Rates Today?
Mortgage rates are a primary concern when purchasing a home. Lower rates make for lower mortgage loan payments, while higher interest rates can make it challenging to find affordable payments or even get approved for financial assistance.
But how are these rates determined, and what can you do to ensure you get the lowest possible rate? Here's an explanation of how mortgage interest rates are determined.
The interest rate for each type of loan dramatically depends on the time, credit risk, tax considerations (especially in the U.S.), and convertibility of the specific loan.
Risk generally refers to the likelihood of the mortgage loan being repaid. A greater chance that you won't repay your loan leads to higher rate levels. However, if the loan is secured, meaning it boasts some collateral that your lender will acquire in case you don't pay back the loan, the rate will probably be lower. This is because the collateral already accounts for the risk factor.
Of course, for government-issued debt securities, there's minimal risk because the government is the borrower. That's why the interest rates on treasury securities are low.
Time is also a primary risk factor when checking loans of different types. For instance, long-term mortgage loans have a high chance of not being paid back because there's more time for the adversity that can lead to default. Plus, the face value of long-term mortgage loans compared to short-term home loans is more susceptible to the effects of inflation.
That said, the longer you stay without repaying your mortgage, the more interest your lender should also reduce. Finally, some mortgages that can be quickly converted back into money will have little to no loss on the principal loaned out. Such loans usually come with relatively lower interest rates.
Your credit score is typically a three-digit number that carries significant weight when dictating your creditworthiness. When your lender is extending credit, your credit score is the best predictor of risk.
Factors that influence your credit score include:
- Amount of credit utilization
- Types of credit
- Payment history
- Length of established credit
- Number of any recent credit applications
Negative activity, such as a missed or late payment, can lower your credit score, while responsible activity like low credit card account balances and timely repayment can raise your score. And the higher your score, the greater your lender's confidence in your capability to make your loan payments.
If the price of your property is high or low, it can affect the mortgage rate your lender offers you. Typically, lenders consider a high loan amount more of a risk, thus raising the interest rate.
One of the most common patterns in the buying process is that the higher your down payments, the lower the mortgage interest rate. Your lender can see you as a high risk if you're putting less money towards the property upfront, which will increase the amount of money that will be borrowed.
Most lenders who give less money toward a house consider this lower risk and is favorable to their eyes. Borrowers providing a 20% down payment may qualify for lower rates than those only offering 5% down. Plus, if you put less than 20% down, you'll be required to pay PMI (private mortgage insurance), which will eventually increase your overall payment.
Mortgage rates today can vary depending on the location of the property you'd wish to buy. And by saying location, we mean the state where the property is and whether the place is in an urban or rural region.
One reason location dramatically influences the mortgage rate you may qualify for is that each state has its foreclosure laws, which can significantly affect how you can foreclose on a defaulted home. Another reason is that borrowers in an area usually influence the rate because most lenders will consider the rate at which new homeowners default.
Interest Rate Type
There are two primary types of mortgage rates today: fixed and adjustable. Fixed interest rates don't change over time. On the other hand, adjustable rates have initial fixed periods, and then the rates fluctuate either up or down depending on the market.
Adjustable rate mortgages customarily boast lower initial interest. However, your rate might increase significantly throughout the life of your loan.
That said, it's imperative to consider the type of mortgage rate that best suits your current and future financial state, not to mention how long you plan to own your new home.
Supply and Demand
Mortgage rates are a factor of credit supply and demand - an increase in the demand for credit or money will raise rates, whereas a decrease in the need for cash or credit will significantly decrease them. Conversely, an increase in credit supply will reduce mortgage rates, while a decrease in credit supply will increase them.
It's also worth noting that increasing the amount made available for borrowers can increase the credit supply. For instance, you're lending money to the bank when you open an account. And depending on the type of account you have, the bank can use your money for its investment and business activities.
In other words, your bank can lend out that cash to other customers. And the more it can do so, the more credit is made available to the economy. As the credit supply increases, the price of borrowing (mortgage interest) decreases.
Credit available to the economy will also decrease as lenders decide to defer repaying their loans. For example, suppose you postpone paying your credit card bill this month. In that case, you'll be increasing the mortgage interest you'll have to pay and minimizing the amount of money available in the market. This will, in turn, increase the rates in the economy.
Loan-to-value Ratio (LTV)
The loan-to-value ratio (LTV) is usually calculated as the amount of financial assistance divided by the appraised value of your home and is expressed as a percentage. Generally, the higher your percentage, the less equity you have in the House, which most lenders believe brings more financial risk to the equation. For instance, if your home's appraised value is $125,000 and you finance $100,000, your LTV is 80%.
In the eyes of lenders, homebuyers with higher loan-to-value ratios are highly likely to default on their loans, and if that happens, they run the risk of having to sell their House for less than the outstanding loan balance. That's why most banks prefer a lower loan-to-value ratio so that if the property goes into foreclosure, they can quickly recoup enough resources to satisfy the remaining mortgage balance.
Generally, having less than an 80% LTV requires an additional PMI (private mortgage insurance), which protects lenders if borrowers default on the mortgage loan.
Why Interest Rates Are Currently at Where They Are
According to Freddie Mac, the average 30-year fixed interest rate rose from about 3% in December last year to 5.81% in June. Mortgage rates have been volatile throughout the summer season, and borrowing costs for both adjustable-rate and fixed-rate mortgage loans remain to be significantly higher today than they were this time in 2021.
Here's why these rates are currently at where they are.
The Federal Reserve
Contrary to popular belief, the Federal Reserve doesn't set mortgage rates today. Instead, it influences these rates.
The Fed regulates short-term mortgage rates today by increasing or decreasing them. While mortgage interest rates aren't tied directly to the Fed rates, when these rates change, the prime rate for mortgage loans usually follows suit shortly afterward.
The Fed controls short-term rates mainly to control the money supply. If the economy is struggling, the Federal Reserve lowers the rates. Note that these rates aren't given to borrowers, but they're rates at which banks and other lenders can borrow money to lend to potential homebuyers.
Prices of all goods and services are usually set by considering the general price increase in our economy - inflation.
Mortgage rates and inflation usually go hand in hand. When inflation increases, mortgage rates today rise to keep pace with the dollar's value. On the other hand, when inflation decreases, interest rates drop. These rates tend to stay the same during a period of low inflation or may fluctuate slightly.
What Can You Do to Get Better Interest Rates in Glades County, Florida?
Finding and securing a lower interest rate for your circumstance is among the primary considerations when applying for your home loan. To qualify for the best interest rate, you want to position yourself in the best possible way from a borrower risk standpoint. Research multiple lenders to land the best overall loan deal is also in your best interest.
Here are three primary ways of getting the lowest mortgage rate today in Glades County.
Put More Money Down
If you've got time on your side, saving up for a more significant down payment can potentially help you qualify for better mortgage rates today. Moreover, it can make you a more competitive buyer, especially if another bidder on the same property is putting down less.
Have a Better Credit Score
Even a minimal increase in credit or FICO score can propel you to a higher tier of creditworthiness. This may be reflected in the mortgage rates you're offered.
You can make credit improvements by paying down your debts, correcting credit report errors that can negatively impact you, and reconciling past delinquencies.
Shop Around and Get Your Documentation In Order
Although putting more money down or improving your credit score is an excellent path to better mortgage rates, that's often not possible for most borrowers, especially if they've landed on their dream house and need to act quickly. Here, one of the best things you can do is give yourself alternatives. Shop around to find the best option for your needs and budget.
Once you've found a house and are quoted a strong mortgage rate, you'll have to complete the loan application process on time to lock in the interest rate. You want to have all your financial documents ready to go.
Most lenders like to work with borrowers with two years of job history and earnings. Other documents needed include pay stubs, bank statements, tax returns, and permission for your lender to check your credit reports.
5 Great Activities for Children in Glades County, Florida
Glades County, Florida, is a fantastic place home to a diverse agricultural landscape, great people, and abundant natural resources. The people here are colorful in their history, firm in their faith, and diverse in their heritage.
Here are five things to do with your kids in Glades County.
Visit the Lakes Regional Park
Lakes Regional Park is an ideal family-friendly park in an excellent location. It boasts plenty of biking paths, walking paths, and seating areas. As a family-oriented park, the Lakes Regional Park hosts events throughout the year and has splash pads that are nice for children to cool.
Whether you're interested in biking, kayaking, birdwatching, hiking, or picnicking, the Lakes Regional Park has covered you. Aside from the splash pads, your kids will love the playground and rock climbing, not to mention the Miniature Railroad and Train Village. This park also features Community Gardens, restrooms, free WiFi, and a sensory experience of trees, shrubs, and plants.
Travel Back in Time at the House of Refuge Museum
As one of the oldest structures on the Treasure Coast, The House of Refuge Museum has weathered many storms and offered shelter for shipwreck survivors. Home to historical maritime artifacts, furnishings, personal items belonging to the House's keeper, and a model ship collection, this is the perfect place for your kid to learn more about the past.
Tours offer a look at the coastal living at the refuge, including a WWII lookout tower and the boathouse living quarters. The museum is also for rent as a beautiful seaside locale for everything from weddings to business gatherings.
Go Fishing at Lake Seminole
Lake Seminole is well-known as one of the best grounds for sports fishing in the U.S.A. Extensive stump and grass beds offer abundant cover where both avid and professional anglers battle scrappy hybrid, lunker largemouth, and striped white bass. Sizeable populations of crappie, catfish, and beam are also present.
You can try bank fishing with your children at various locations, including riprap by bridges, at the mouths of different creeks flowing into the lakes, and on public fishing decks.
Take Your Kids to Enjoy Nature at the Tom Perry Memorial Park
The Tom Perry Memorial Park hosts a variety of recreational activities for the entire family. It welcomes young park goers to its extensive playground and nearby splash pad.
Multiple tennis and squash courts are also available for your kids to play around the Court area. The attractive views of the beautiful River Walk are ideal for taking in as you explore.
Fishing and pavilion picnics are also allowed along the waterside. Feel free to visit this fantastic location where you can enjoy grill, fishing, tennis, and dog walking.
Learn About the Ortona People at the Ortona Indian Mound Park
The Ortona Indian Mound Park features an interpretive display, a 270 ft. wooden boardwalk, benches, and a covered picnic shelter. Although less than a mile long, this park's trail offers you and your family a chance to walk in the Ortona people's footsteps and view some of their burials.
You also get to see the extensive canal system these people built among the hammocks and scrubs. If your kids are history buffs, they'll love their experience at the Ortona Indian Mound Park.
The Bottom Line
Mortgage rates today significantly affect the economy by influencing bond interest rates, inflation, consumer and business spending, stocks, and recessions. However, it's vital to understand that there's usually a 12-month lag in the economy, which means it will take at least one year for any decrease or increase in mortgage interest rates to be felt.
By regulating the federal funds rate, the Fed keeps the economy in perfect balance over the long term. Generally, understanding the relationship between the U.S. economy and interest rates will allow home investors in Glades County, Florida to understand the big picture and make the best investment decisions.