As the WHO declares the COVID-19 a global pandemic, economies around the globe are reeling. In the US, we’re seeing fluctuating interest rates during this hectic time. But why are interest rates shifting so much? What factors contribute to these mortgage rates, anyway?
Several factors affect your final mortgage rate, many of which are out of your control. See which factors influence mortgage rates and how you can fight for a lower interest rate on your home loan.
2 factors you can’t control
External factors like the economy and the Federal Reserve are outside of your control. However, they can have a significant impact on interest rates, with the potential to affect your finances for decades.
1. The economy
Both the US and the global economy play a role in mortgage rates. Generally speaking, the more growth, the less inflation, and the lower unemployment, the lower the mortgage rates tend to be.
But when people lose their jobs or when the US dollar loses buying power, lenders increase interest rates. High inflation means the US dollar doesn’t go as far as it once did. To make up for it, lenders ask for higher interest rates.
Depending on the factors at play, the economic climate means you could pay higher or lower interest rates.
2. The Federal Reserve
Contrary to popular belief, the Federal Reserve doesn’t directly set mortgage rates. However, it does set interest rates based on how the economy is doing, and this can affect your mortgage.
Mortgage rates are based on the bond market, or mortgage-backed securities. The Fed controls the interest rates on the bonds backing up these mortgages, ultimately affecting your mortgage interest rate.
The Fed recently cut interest rates to nearly 0% in an effort to stimulate the economy following the coronavirus fallout. However, just because the Fed cut its rates doesn’t mean mortgage rates will also fall. Historically, mortgage rates fall slowly. While we may see some decreases right now, it may be wise to see how the market adjusts to these rate slashes first.
The 2 factors you can control
You can’t control the economy or the Federal Reserve, but you do have control over these 2 factors that influence your mortgage interest rate.
1. Your credit score
The higher your credit score, the lower the interest rate you’ll receive. To a lender, a low credit score means you’re a riskier bet; they assign a higher interest rate to make their money back more quickly in the event you default on the loan.
But if you work on increasing your credit score before buying or refinancing a home, you can score a better interest rate on your mortgage. Pull your free credit report to see your score. This shows information on your past credit history, payments, loans, and credit cards.
Shoot for a credit score of 740 or higher to get the best interest rates. If your score is 620 or lower, you’ll likely pay higher interest rates.
2. Your loan-to-value ratio
If you buy a $200,000 home, put down a $40,000 down payment, and finance for $160,000, you’re borrowing 80% of your home’s value. That gives you a loan-to-value ratio of 80%.
Lenders don’t like to see loan-to-value ratios higher than 80%. They consider this more high-risk and may assign a higher interest rate to compensate for it. If you can, apply at least a 20% down payment to your home. This will help you score a lower mortgage rate and help you avoid mortgage insurance (PMI), which can increase your monthly mortgage payment.
The bottom line
So many factors play into your mortgage interest rate. Some of these factors, like the economy, are outside of your control, but there are steps you can take right now to improve your potential interest rate.
We’re living in a time of uncertainty right now. While COVID-19 will end and life will go back to normal, it’s important to see how a pandemic can affect your finances. Keep a watchful eye on mortgage rates over the next 2-3 months to see if it’s the right time to refinance or purchase a new home.
Not sure about your mortgage interest rate? Get in touch with Ropal Realty. Our experienced team of real estate agents can help you make sense of this uncertain and confusing time.