How Are Mortgage Rates Calculated?
Lenders usually determine mortgage rates based on current market rates and the county’s economy. If the economy is doing well, interest rates will shoot up since lenders assume borrowers have more money to spend and can afford higher rates. When the economy is not so great, the rates consequently decrease.
Unemployment rates also determine mortgage rates. An increase in unemployment leads to decreased interest rates, allowing borrowers to take out loans affordably.
The duration of the mortgage equally determines the interest rates. Typically, mortgages are available in 15-year and 30-year terms. 15-year mortgages have lower interest rates but attract higher monthly payments. In contrast, 30-year mortgages have higher interest rates but lower monthly payments since it costs more to lend money for such a long period.
Banks and lenders receive rate sheets daily. These detailed sheets provide guidelines that lenders use to calculate mortgage rates. Since the rates can change several times a day, it is best to request your lender to lock in a lower mortgage rate before it rises again.
Factors that Drive Mortgage Rates Today
Mortgage rates constantly change because of various related factors. Risky borrowers attract higher interest rates to protect lenders in case of defaults, while the best borrowers enjoy lower rates. Like any other loan, personal qualifying factors also come into play.
Here is a breakdown of the main factors that influence mortgage rates today:
You can use various types of mortgages to buy your dream home. Popular home loans include conventional, VA, FHA, and USDA loans. Each loan type attracts varying interest rates. Conventional mortgages attract the highest interest rates, depending on the lender, while VA, FHA, and USDA loans have the lowest rates since they are government-backed.
VA, FHA, and USDA loans target Veterans and low-to-moderate income families by making homeownership more affordable. For this reason, these loans have lower mortgage rates.
Given the numerous loan types, it is a good idea to shop around and talk to different lenders to understand the available financing options and get better rates.
Various loan programs have varying terms or duration that determine how much you will pay in the long run. The period directly impacts the mortgage rates. The longer the loan duration, the higher the interest rates, and vice versa. It costs more to lend money for more extended periods.
Typically, mortgages are available in 15-year and 30-year terms. 15-year mortgages have lower interest rates but attract higher monthly payments. In contrast, 30-year mortgages have higher interest rates but lower monthly payments since it costs more to lend money for such a long period.
Your FICO credit score determines if you qualify for a home loan and similarly impacts the interest rates of the mortgage. Lenders use these scores to calculate your creditworthiness and predict your ability to repay the loan. They offer lower interest rates to borrowers with higher credit scores than consumers with bad credit or no credit history.
Before applying for a loan, check your credit report for errors. Any mistakes could lower your credit score, consequently attracting higher interest rates. You can dispute discrepancies by consulting the credit reporting company.
You can check your credit report online through a credit score service or a non-profit credit counselor.
Even though you can get 100% financing for your new home, most lenders expect borrowers to place a down payment. Depending on the loan, you may place a down payment ranging from 3.5% to 20% of the home value.
A sizeable down payment indicates intent and shows you are less likely to default on your loan. With that in mind, lenders are willing to offer lower interest rates if you deposit a substantial down payment.
If your down payment is low, the lender will require you to pay mortgage insurance (PMI). The insurance premiums protect the lender from defaulters and add to the total cost of the loan. You will pay higher mortgage rates if your down payment is less than 20%.
When shopping for a mortgage, consider the total cost of the entire loan and not just the interest rates to find a better deal.
When applying for a mortgage loan, the lender will determine interest rates based on occupancy details. Primary residences attract lower interest rates since you’ll primarily live in that home.
Besides, qualifying for a mortgage for a primary home is much easier. Many mortgages focus on helping aspiring buyers purchase their first homes, explaining lower interest rates.
Second homes or investment properties have higher mortgage rates since you are more likely to default on the loan if you have financial issues. The higher rates cushion the lender from the risks.
The loan-to-value ratio is a risk assessment done by lenders by comparing your down payment against the mortgage. It also checks the home value against the loan amount you are seeking.
A high loan-to-value ratio means you are a risky borrower, while a lower loan-to-value ratio shows you are less risky. The more risk you pose to the lender, the higher your mortgage rates and vice versa.
You can improve your LTV rating by placing a larger down payment. Lenders assume a sizeable down payment is enough incentive for borrowers to pay off their debts without defaulting.
The home value can determine mortgage rates, depending on how much you intend to borrow. The home price includes the closing costs and mortgage insurance but does not factor in any down payment. A higher home price attracts higher interest rates if you intend to borrow a substantial amount.
Conversely, mortgage rates affect housing prices since they have an inverse relationship, albeit weak. Low home prices might mean higher rates and vice versa.
The lender might calculate mortgage rates based on the location of the property you want to buy. Different states have varying interest rates on home loans. Moreover, homes in rural areas have lower rates than in urban areas.
The current mortgage rates in Polk County, Florida, are 4.46% for a 15-year loan and 5.13% for a 30-year loan. Since the rates are not standard, consider shopping around to find the different loan products available.
The loan amount has a significant impact on mortgage rates. Borrowing a large amount attracts a higher rate to help lenders reduce the risk. In contrast, a small loan amount has lower interest rates due to the reduced risk.
You can significantly reduce the interest rates by placing a substantial down payment while borrowing a smaller amount. Ensure the down payment is at least 20% of the home value to enjoy lower mortgage rates.
Interest Rate Type
Mortgage rates can be fixed or adjustable. A fixed-rate mortgage has a set interest that remains the same throughout the loan’s life. The principal amount, interest, and monthly payments vary from payment to payment, but the total repayment cost remains unchanged, making it easier for aspiring buyers to budget. It also provides some protection from changes in mortgage rates.
An adjustable-rate mortgage has an interest rate that changes over time. It can rise or drop multiple times throughout the life of the loan based on market rates. The initial interest rate is usually lower than the market rate but can increase significantly later.
Why Are Mortgage Rates Currently at Where They Are?
Mortgage rates are currently at where they are because of market factors such as Fed hikes, the bond market, inflation, the economy, CMT rates, and the secured overnight finance rate.
Here’s a breakdown of the market factors that impact mortgage interest rates:
The State of the Economy
The health of the economy has a big impact on mortgage rates today. If the economy is on a high, lenders assume borrowers have more money to spend. A healthy economy also translates to lower unemployment rates. With that in mind, mortgage rates increase as consumers can afford the higher interest rates.
Conversely, spending usually drops if the economy is not doing so well and there are high unemployment rates. Mortgage rates similarly fall because of the poor state of the economy.
Mortgage interest rates and inflation are almost inseparable even though the latter does not impact rates directly. Rising inflation influences purchasing power as it increases the prices of nearly everything, including goods and services, and mortgage rates are no exception.
Since inflation reduces spending, taking out a mortgage can become less affordable. Inflation forces investors to shy away from mortgage-backed bonds resulting in higher rates for all mortgages.
The Federal Reserve
The Fed is responsible for monetary policies designed to control inflation and keep unemployment rates low. Even though the Federal Reserve does not set interest rates, it somehow impacts mortgage rates.
Some decisions can hike federal fund rates, making it more expensive for banks to borrow. In turn, the banks and lending institutions pass on the increased rates to consumers, consequently making it more costly to take out a mortgage.
The good news is that rate changes are usually short-term and do not directly target borrowers but banks and lending institutions. Some banks may decide not to pass on the increased costs to consumers.
The Bond Market
Bonds affect mortgage rates inversely. As bond prices increase, interest rates decrease and vice versa. This is because most lenders tie mortgage rates to treasury bond rates. High bond prices make bonds more valuable in the secondary market, causing lenders to lower their rates.
Then again, the demand for mortgage bonds affects current mortgage rates. Increased demand for mortgage-backed securities means the stock market is performing poorly, leading to higher interest rates. A low demand translates to decreased mortgage rates. Nonetheless, bond market prices only impact fixed-rate mortgages.
The Secured Overnight Finance Rate
Another factor influencing mortgage rates today is the Secured Overnight Finance Rate (SOFR). SOFR is an interest rate banks use to determine home loan rates based on Treasury repurchase transactions. It is set on the rate of overnight borrowing hence the name.
SOFR usually affects adjustable-rate mortgages, and the interest rates can go up or down depending on whether current adjustments are pegged to the London Interbank Offer Rate (LIBOR).
The Constant Maturity Treasury Rate
Constant Maturity Treasury Rate is the value of Treasury securities the US government offers. The rate is the yield of different securities set to mature at various times used to demonstrate to investors the kind of average yield they should expect from these short-term debt securities.
Some lenders use the CMT rate as a reference point when setting interest rates for adjustable-rate mortgages. If the CMT rate is high, borrowers should expect higher mortgage rates and vice versa.
How to Get Better Mortgage Rates?
If you're looking for the best mortgage rate today, here are several tips to help you improve your chances of getting a low rate:
Place a Larger Down Payment
The amount of down payment impacts the interest rates on your mortgage and the overall cost of the loan. Paying a small amount attracts higher interest rates, while a larger down payment can significantly reduce the rates.
A larger down shows lenders your commitment to pay off your debt. Consider paying at least 20% down to enjoy lower interest rates.
Improve Your Credit Score
Lenders check your FICO credit score to determine your creditworthiness and calculate your mortgage rates. A higher credit score attracts a lower interest rate.
You can improve your credit score by paying your bills promptly, using credit cards sparingly, avoiding new loans, and keeping old accounts active. Ensure you check your credit reports frequently and dispute any errors.
Apply for a Short-term Mortgage
Typically, mortgages are available in 15-year and 30-year terms. 15-year mortgages have lower interest rates but attract higher monthly payments. If you can afford the monthly payments, consider taking out a short-term mortgage to enjoy lower rates.
Do not take out a loan from the first lender you meet. Always shop around and compare rates from different lenders to find the best deal. Some lenders are willing to offer you better rates with lower qualification requirements.
Top 5 Things to Do in Polk County, Florida
There are lots of activities that are fun for kids in Polk County, Florida, including:
Visit Legoland Florida Water Park
Legoland is the ultimate fun destination for kids and adults alike. The resort features a water park, botanical garden, and a theme park with various shows, rides, and attractions.
Your kids will love the hands-on areas where they can build various structures with LEGO blocks and bricks. Legoland also has several restaurants and eateries where you can grab a bite after a long day touring the resort.
Explore the Bok Tower Gardens
The Bok Tower Gardens is another excellent location for children and the entire family. This 250-acre garden doubles as a bird sanctuary and features various bird species.
The main attractions are the 205-foot Singing Tower and the 60-bell grand carillon surrounded by breathtaking landscapes. The Bok Tower Gardens is ideal for picnics and nature trails, plus it has a café that offers delicious sandwiches and meals.
Tour the Polk Museum of Art
The Polk Museum of Art is a private museum with a global collection of ancient and modern pieces. It has a student area where local schools display beautiful and educative exhibits.
The museum also has a gift shop where you can purchase exciting collectibles. The Polk Museum of Art opens daily; the best part is that entry is free.
Visit Colt Creek State Park
If you love the outdoors, consider visiting Colt Creek, State Park. The park offers over 5,000 acres of wilderness, forests, and wildlife habitats. It is home to various animals, including squirrels, white-tailed deer, eagles, and gopher tortoises.
The area is excellent for hiking, nature trails, kayaking, canoeing, fishing, horseback riding, biking, and bird-watching.
Explore the Explorations V Children’s Museum
The Exploration V Children’s Museum is an excellent destination for hands-on activities ranging from painting to drawing. This state-of-the-art museum has something special for the whole family.
It hosts various educative programs and events throughout the year, including field trips and out-of-school camps. The best time to visit is in the summer, as the museum has dozens of activities tailored for kids.