Why Do Mortgage Rates Go Up?

    Why Do Mortgage Rates Go Up? Buying A House At The Best Price

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    If you’re looking to finance your home, then you’ll most likely be looking for low-interest rates and agreeable terms. The amount of money a borrower will have to set aside for monthly payments is determined on a case-to-case basis. But what influences mortgage interest rates’ fluctuation and why do mortgage rates go up? 

    Mortgages are influenced by several factors both in and out of your control. Understanding them is instrumental in making an intelligent decision about your finances. Read on to see how you can improve your mortgage interest rates so you can finance the home of your dreams. 

    What Factors Affect Mortgage Rates? 

    Your mortgage rate or interest rate is often a deciding factor in financing your home. One thing you need to remember when exploring mortgage rates is that lenders will chart mortgage rates on a per-borrower basis. Typically, borrowers with exceptional credit scores are seen as low-risk, which results in a lowered interest rate. But what are the other factors to consider when exploring mortgage rates? 

    Economic Growth

    As a rule of thumb, mortgage rates follow the same ebb and flow as economic growth. Economic growth indicators such as gross domestic product (GDP) and the unemployment rate influence mortgage rates. Mortgage rates tend to rise during periods of economic growth and low unemployment. The assumption is that employed people have more purchasing power, which leads to a greater demand for real estate.

    Conversely, a weakening economy experiences the opposite. As unemployment rates rise and wages decline, the demand for home loans dwindles and mortgage rates go down. 

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    Inflation

    With inflation comes the gradual increase in commodity price and the decline of an individual’s buying power. Lenders rate mortgage prices accordingly in times of inflation. Specifically, lenders demand higher interest rates to compensate for the dollar’s waning buying power. Counter to this, low inflation rates also mean that mortgage rates will also wane.

    Your Credit Score

    Borrowers with better credit scores receive lower interest rates than borrowers with lower credit scores. Lenders use credit scores to assess borrower risk. This includes the likelihood of a borrower paying their mortgage on time based on credit history. This includes loans, credit cards, and payment history. 

    State Of The Housing Market

    In line with the law of supply and demand, more homes being built and sold on the housing market mean that there is also a greater demand for home loans. This greater demand results in increased mortgage rates. However, if there aren’t as many houses on the market or if more people opt to rent instead of buy, mortgage rates tend to decline. 

    The Bond Market 

    Although it isn’t always the case, mortgage interest rates are closely related to the movements within the bond market. Investors tend to invest more money in the bond market when the economy is doing poorly since bonds are a lower-risk investment. The more people invest in bonds, the higher the bond yield becomes, which typically results in mortgage rates rising as well. 

    The main reason that mortgage rates are influenced by the bond market is that many mortgage funds come from investors. While many mortgage funds are pulled from deposits at banks and brokerages, mortgage investors’ activities are a large part of mortgage rate fluctuation. 

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    Mortgage-Backed Securities

    Mortgage-backed securities, or MBS, are bonds secured by home and other real estate loans. They are generally created when several loans with comparable characteristics are pooled together. In practice, a bank may round up a group of these loans and sell them to a federal government agency like Ginnie Mae or a government sponsored-enterprise like Freddie Mac.

    Mortgage investors do not typically buy an entire individual mortgage, and instead, buy shares of a group of similar mortgages and loans. 

    How Do Mortgage-Backed Securities Affect Mortgage Interest Rates? 

    Ordinarily, mortgage rates are dependent on supply and demand. This same concept applies to how MBSs affect interest rates. Without government intervention like the Federal Reserve, mortgage investors can choose to buy MBSs or not, which ultimately affects the price of loans and their corresponding interest rate. 

    Federal Reserve

    The Federal Reserve Bank plays a large part in interest and mortgage rates due to its monetary policy. The Federal Reserve can raise or lower the federal fund’s rates, which are the interest rates that lenders may charge for short-term loans. In turn, long-term bank loans like mortgages are also influenced by the rise and fall of the federal fund rates.  

    Loan-Specific Details

    When considering mortgage rates, the loan and its many facets also influence your personal mortgage rates chart. Here are some of the things to examine to help you make your decision: 

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    Home Location

    Many lenders will offer you a different interest rate depending on which state you live in. There are several tools online that potential borrowers can use to get an idea of the mortgage rate chart they are most likely to experience when canvassing for their home loans. 

    Home Price And Related Costs

    The total amount of money that you’ll need to borrow when you chart mortgage rates is inclusive of your home price and closing costs minus the downpayment to your mortgage lender. In some cases, mortgage rates may also be influenced by insurance policies that you take out on your home. Be sure to consider these factors and not just the basic price of your home when looking into creating a chart of mortgage rates. 

    Down Payment

    Typically, setting aside some money for a larger down payment results in a lower rate for mortgages. This is because lenders regard potential borrowers with a larger stake in their loans as lower risk. The size of your down payment can also affect your rates in another way, especially if you can’t pay at least 20 percent of the total money value of your loan. 

    Lenders may require borrowers that pay under 20 percent of their loan to purchase insurance that protects the lenders from the financial risks involved with having a borrower that may not be able to fulfill the rates over time. This insurance is an added cost on top of a borrower’s pre-existing monthly payment and makes owning a home significantly more expensive in the long term. 

    Loan Term

    Mortgage loan terms usually go for a 30-year fixed-rate or a 15-year fixed rate. Generally speaking, shorter-term loans have lower interest rates and lower costs, but monthly payments are higher than the longer alternative. Longer loans like a 30-year fixed rate usually have higher interest rates that result in paying more over time, but this varies with each lender and borrower. 

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    Loan Type

    Lenders have a wide selection of loan types that they can offer to potential buyers. Loan types are one of the many reasons why your mortgage rates might go up or down, and each also has its own set of requirements and qualifications. 

    One commonly-offered loan is the conventional loan, which is typically not insured or guaranteed by the government. Next is a Federal Housing Administration (FHA) loan which provides mortgage insurance to FHA-approved lenders to protect them against losses. A USDA loan is aimed at assisting low-to-moderate income families so that they may build or repair existing homes, while VA loans are designed to benefit veterans. 

    Interest Rate Type

    There are two kinds of interest rates: fixed and adjustable. Fixed rates do not change over time and remain constant throughout the entire loan, while adjustable rates fluctuate with the market. Do note that while adjustable rates may seem cheaper in the beginning, they can vary wildly with economic movement and growth. In practice, a 30-year loan of either interest rate type doesn’t guarantee the same amount paid at the end. 

    Things To Consider

    Now that we’ve briefly explored the factors that affect your mortgage, we must find simple ways to apply this knowledge. When the time comes that you are taking out a mortgage for your home, there are a few things that you, as an individual borrower, can consider when choosing terms that suit you best. 

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    Different Lenders, Different Mortgage Rates 

    Mortgage rates vary depending on your lender. Lenders have various tolerances and appetites for risk and different costs associated with running their businesses. On top of this, lenders do not have an unlimited number of loans that they can process. If a lender is at max capacity with the number of loans they can process, they may raise their interest rates. The opposite is true when business is slow so more borrowers are inclined to apply for a loan. 

    Points And Interest Rates

    As you canvas different mortgage rates, you may find that some lenders offer “discount points” or lender credits that allow concessions to be made in the way your loan can be paid. Some lenders may allow borrowers to “pay points” up-front, which may result in a lower interest rate. On the other hand, lenders may also deal in lender credits that essentially mean you pay less up-front but your interest rate increases. 

    However, not all lenders have a points system, and not all borrowers are interested in it. 

    Your Credit Score Makes a Huge Difference

    Borrowers are usually evaluated by lenders based on their FICO score, which grades consumers in a 300 to 850 point range. Higher scores on this scale indicate that a borrower is low-risk, while lower scores indicate the opposite. Checking your credit score before looking into houses is considered best practice, but what is a good credit rating?

    • 800 or higher: Exceptional
    • 740-799: Very good
    • 670-739: Good
    • 580-669: Fair
    • 579 or lower: Poor

    While this is a good starting point for evaluating yourself, lenders often have their own set of prerequisites and qualifications for loans. The smallest difference in score may result in a change as large as .5%, and considering that your 3.5% interest rate then becomes 3.0%, every point matters. 

    Conclusion

    Potential homeowners regularly seek loans and mortgages to make their real estate dreams come true. However, mortgage interest rates can vary from lender to lender and based on how well the economy is doing. 

    Understanding what makes interest rates vary can make your goal of having a home more achievable. The economy, the bond market, federal reserve, and the general supply and demand of the housing market all play a part in how much you’ll be paying. However, your credit score and details specific to your loan are equally important when canvassing for the best rates. 

    Wesley Mortgage, LLC can help you make the best decision for financing your home. Get in touch with us today and let us know how we can assist you.

    Written By Ed Wallace
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