In this article, you'll learn everything you need to know about mortgage rates, including how they are determined, what factors drive them up, and how to get the best rate when buying a house on a mortgage.
Are you a first-time homebuyer? Learn more about the available FHA home loan options in Monroe County, Florida.
What Determines Your Mortgage Interest Rate?
Several factors determine the interest rate that you are offered by a lender when applying for a mortgage. In general, mortgage lenders tend to offer low-interest loans to borrowers they perceive as "low risk, " meaning they are less likely to default.
On the other hand, if your lenders consider you a "high risk" borrower, lenders are likely to charge demand a higher interest rate.
Let's look at some factors that may influence the interest rate that your mortgage attracts.
As highlighted before, lenders are interested to know whether you'll be able to pay your mortgage if they approve you for one. They are more likely to offer you lower interest rates if they are confident in your ability to pay the mortgage.
One of how they establish this is by evaluating your credit profile, specifically, your credit score. While every lender is different and will have credit requirements for mortgage applicants, borrowers with credit scores above 700 are generally offered the best interest rates.
Therefore, if you are seeking to take out a mortgage, it is important to look critically at your credit score and dispute any errors on your credit report to correct them. If your credit score is too low, you can also take time to improve it before applying for a mortgage. This will go a long way towards increasing your creditworthiness in the eyes of your lenders.
Location Of The Home
Mortgage lenders often offer different rates depending on where a borrower buys the property. Some location-specific variables lenders consider when determining what interest to offer a borrower include the state where the property is located and whether the area is rural or urban.
One of the reasons why the location of a home might influence interest rates is because different steps have different foreclosure laws, which dictate how a borrower can foreclose on a defaulted mortgage.
Likewise, lenders consider the credit behaviors of other borrowers in an area when considering what rates to set. In other words, if borrowers in an area tend to default on mortgages, lenders are likely to set high-interest rates for current and future borrowers.
A property's price significantly affects how high or low lenders will set the interest rate. Generally, the higher the home price, the more likely lenders will view it as a "high risk."
Consequently, they may decide to set a high interest on the mortgage to cushion themselves against the risk.
Type of Loan
As you may already be aware, various mortgage products are on the market, many of which cater to specific demographics. While certain mortgage products such as FHAs and HFAs are meant for homebuyers of all backgrounds, some, like the VA loan, are strictly for veterans. In contrast, USDA loans help prospective homebuyers purchase homes in rural areas.
Each loan product has unique eligibility requirements and standard interest rates. So, if you're seeking a mortgage to purchase a home, you need to review different options to find the most suitable one.
The loan term refers to the duration you are expected to complete repayment of a loan. Usually, loans with short terms attract lower interest rates than long-term loans, although they also often incur high monthly payments.
However, as mentioned before, the amount of interest levied on a mortgage also depends on the perceived creditworthiness of the borrower. This means it is possible for you to secure a low-interest long-term mortgage (30 years) if your credit score is good.
The amount of down payment you make on a mortgage has a lot of bearing on the interest rate that a lender charges you. As a general rule of thumb, the higher the upfront payment you make on a home, the lower your mortgage's interest rate is likely to attract.
This is because lenders view borrowers as "low risk" if they make a substantial down payment on a mortgage, which essentially decreases the loan they'll borrow. On the other hand, a borrower putting less money into a down payment is likely to be perceived as a high risk.
Market Factors Driving Current Mortgage Rates?
Although your financial position plays a huge role in the interest rate your lenders offer you on a mortgage, overall current mortgage rates are influenced by several economic and government monetary policies.
These factors can drive the mortgage rates up or down as they directly impact the entire housing market. Therefore, if you're planning to take out a mortgage, it is critical to understand these factors and how they affect mortgage rates.
Let us now look at some of the common factors that drive current mortgage rates:
Inflation refers to the general increase in the prices of goods and services in an economy. This price increase leads to each unit of currency purchasing fewer items than before. As a result, inflation causes a reduction in the purchasing power of the currency.
The state of inflation in an economy is a critical indicator of its overall health and is therefore closely monitored by mortgage lenders. Since inflation reduces the purchasing power of money over time, lenders have to keep their interest rates at a level that compensates for the dollar's drop in value.
For instance, if the current mortgage rate is 4% and the yearly inflation rate is 2%, the actual return on loan in terms of purchasing power of the dollar is only 2%. Lenders will have to adjust their interest rates to reflect inflation.
Strength of the Economy
The overall state of an economy has a lot of bearing on current mortgage rates. When economic indicators such as gross domestic product (GDP) and employment rise, the demand for goods, including real estate, increases.
A booming economy usually creates competition among mortgage borrowers, thus driving up rates. Conversely, when an economy is undergoing decline or slow growth, employment and wages drop, and the demand for mortgages also falls, causing mortgage rates to drop.
The Bond Market
When the economic outlook is bleak, investors tend to gravitate toward bonds. This is because bonds are generally safer investments than financial assets in other markets. Consequently, when people invest in bonds, they are less likely to invest in other assets.
If a lot of people. Banks and investment companies sell mortgage-backed bonds in the same market as other financial assets. When investing in bonds, the bond yields rise, which causes mortgage rates to go up.
So, to make the bonds appealing to aspiring investors, sellers must make them as competitive as other securities in the market, which they accomplish by raising rates.
Current State Of The Real Estate Market
The current state of the housing market, and by extension, mortgage rates are primarily influenced by the laws of demand and supply. When many homes are sold, the demand for mortgages increases, which causes mortgage rates to rise.
On the other hand, if few homes are built or sold, the demand for mortgages falls, thus pushing interest rates down. Likewise, if more people prefer to rent instead of buying homes, the number of people applying for mortgages drops, thus causing a drop in mortgage rates.
Federal Reserve Monetary Policy
The kind of monetary policy that the Federal Reserve Bank adopts exerts a lot of influence on the economy and prevailing interest rates, including mortgage rates. Although the Federal Reserve doesn't set market mortgage rates, it adjusts the federal funds rate, essentially the interest rates lenders charge each other on short-term loans.
When the Fed Reserve hikes the federal funds rate, this action drives up the interest rate offered to borrowers on long-term loans like mortgages.
How To Get Better Mortgage Rates in Monroe County, Florida
With mortgage rates continuing to rise yearly, securing a low mortgage rate is a top priority for anyone seeking to purchase a home. As previously highlighted, your mortgage rate directly influences the monthly payments you'll be expected to pay and the total amount you'll pay during the loan term.
Therefore, when evaluating the right mortgage product for you, you must set yourself for the best mortgage rates possible.
Fortunately, you can employ several simple strategies to increase your chances of securing a low mortgage rate. These include:
Work on Improving Your Credit Score
As previously stated, your credit score is one of the most important factors that lenders evaluate when assessing whether to give you a loan and at what interest rate. Generally, the higher your credit score is, the better your chances of securing a loan with attractive terms.
While different mortgage products have different minimum credit requirements, and you might even secure some loans with a poor credit score, most lenders favor borrowers with a credit score of 700 and above. This is because a high credit score gives lenders confidence in the ability of the borrower to repay the loan.
Therefore, before applying for a mortgage, reviewing your credit profile and taking some time to improve your credit score to attract the best rates is essential. Some of how you can shore up your credit score include:
Paying your bills on time
Disputing any errors on your credit report
Paying down your revolving credit to lower your credit utilization rate
- Avoid taking on a lot of new debts
Save Up For A Bigger Down Payment
Generally, the lower the upfront payment you make on a mortgage, the higher your interest will likely be charged. This is because lenders perceive you as a high-risk borrower and must therefore charge higher interests to cushion themselves from the possibility that you might default on repayment.
One of how lenders account for this risk is through private mortgage insurance (PMI). When you make a small down payment on a mortgage, you'll be expected to pay PMI premiums until you have achieved enough equity in the home's total value. This essentially translates to higher monthly payments.
On the other hand, making a large initial payment on a mortgage can help you avoid PMI payments altogether and reduce the interest rate levied on the loan. As a general rule, you need to make a down payment of at least 20% to achieve equity on a mortgage and be exempted from PMI payments.
So, if you're looking to enjoy these benefits and save money in the long run, you're better off saving up enough money for a sizeable down payment on your mortgage.
Increase Your Income
Mortgage lenders typically prefer borrowers with a good income profile as they are less likely to fall behind on mortgage payments or completely default on the loan; in other words, they are low-risk borrowers. Consequently, if your financial position hints that you are unlikely to default on a mortgage, lenders are more likely to offer you lower interest rates.
You should strive to maintain a debt-to-income ratio below 36% to increase your chances of securing a low-interest mortgage. If your DTI ratio is high, meaning you spend a lot of your income on debt, you can reduce it by increasing your income.
Shop Around for The Best Rates
Mortgage rates can significantly vary from one lender to the next. So, instead of jumping on the first quote you receive from a lender, it might be worthwhile to compare different lenders to see which one offers the lowest rates.
It is worth bearing in mind that every time you shop for a loan, your lender conducts a hard inquiry on your credit which can knock a few points off your credit score.
So, if you're applying for a mortgage from different lenders, you should endeavor to do so within the 45-day window to prevent your credit score from taking a big hit.
Top 5 Activities for Kids In Monroe County, Florida
Monroe is the southernmost county in The Sunshine State, with a population of 82,874 according to the 2020 census. The county is home to numerous attractions, including museums, parks, and conservatories, many of which are located in its county seat of Key West.
Some of the best activities for children in Monroe County include:
Key West Aquarium
Key West Aquarium is not only one of the oldest aquariums in Florida but also one of the most popular, particularly with families.
Visitors here, both young and old, get the opportunity to get up close and personal with the awe-inspiring marine life, including starfish, sea cucumbers, sharks, and turtles.
Mallory Square is, without a doubt, the central hub of commercial and social activities in Monroe County. It is home to numerous museums, shops, and restaurants and the venue for many annual events, including the famed Sunset Celebration, which attracts thousands of tourists.
Mel Fisher Maritime Heritage Museum
If you're interested in a relaxing and insightful family outing in Monroe County, then the Mel Fisher Maritime Heritage Museum is worth checking out. The museum, dedicated to the life and legacy of the famous treasure hunter Mel Fisher is home to hundreds of artifacts dating back three centuries.
Here, your kids will get the chance to learn about pirates, shipwrecks, and other critical maritime events of the 17th and 18th centuries.
Sheriff's Animal Farm
If your kids are fascinated by animals, as most kids tend to be, then a trip to Sheriff's Animal Farm in Key West Monroe County should make for a fun day.
Here, kids can enjoy playing with over 150 exotic animals, including miniature horses, ostriches, skunks, foxes, and tortoises.
While South Beach is one of the smallest beaches in Key West, it is also one of the city's most attractive, less crowded, and generally safe beaches.
The beach not only has a play area for kids but is also home to the Southernmost Cafe, which offers a wide variety of tasty and reasonably priced foods.
When buying a home through a mortgage, securing the best rates should be one of your top priorities, as it will help you save a lot of money in monthly payments in the long run.
Although plenty of personal and market factors can influence mortgage rates, taking the time to build a solid credit profile, raise a sizeable down payment, and compare different rates when shopping significantly improves your chances of getting the best deal possible.