Learning new things is one of life’s pleasures. You’re never too old to learn something new; and when it comes to purchasing property, you’re never too experienced to understand the nuances involved.
We talk a lot about mortgage interest rates – and you might even say we’re obsessed with it – but what we rarely talk about is what influences mortgage rates and how it affects you on a personal level.
Mortgage rates are determined by market conditions and personal factors. The 30-year fixed-rate mortgage is typically what the majority of homeowners apply for when purchasing a home. These mortgages are heavily influenced by the 10-year Treasury note rather than the federal funds rate. This is why when the Federal Reserve lowers a rate, it does not always translate to a reduction in mortgage rates.
Mortgage rates are also influenced by policymakers, economic issues like the increased cost of fuel, and even international conflicts. Within the mortgage industry, there are complicated calculations that also influence rates.
However, your personal borrower profile will really be the factor that determines the mortgage rate you’ll be offered. At the top of the list is your credit history and credit score. If you have a higher credit score and pay your bills on time, it is more likely that you will pay your mortgage on time and you’ll be offered a lower mortgage rate. Credit scores in the “excellent” range of 760 or higher will also give you access to the best rates.
Next is income. If your income is high enough to handle your monthly mortgage payments, plus your other debt payments, you’re likely to get a lower mortgage rate. Typically, you need to meet debt-to-income (DTI) requirements. Some lenders might require your mortgage payment to be no more than 25% to 28% of your monthly income to qualify for the best available mortgage rate, or they may also look at your DTI, including your new mortgage payment, and offer the best rates if your total debt payments are no more than 33% to 36% of your monthly income.
The length of your mortgage can also influence your rate. For example, a 15-year fixed rate is generally lower than a 30-year fixed rate, as are adjustable-rate mortgages.
Making a larger down payment could potentially reduce your mortgage rate. The more equity you have going into a new mortgage the less likely it is that you will renege on payments.
If you have cash available, paying points or fees upfront will also reduce your mortgage rate.
Not all mortgage lenders are equal and you need to shop around. Get quotes from three to five lenders with exact comparable terms before you make a decision.
Finally, setting up biweekly payments can save you money and interest. This works out to 26 payments a year, the equivalent of making an extra monthly payment.
Mortgage rates have certainly been volatile over the last few months, ranging from below 6% at the end of February to 6.36% in mid-May. Since you have no control over these rates, other than being educated on how you can reduce the rate charged to you personally, the best thing to do is follow the daily rates if you are planning to apply for a mortgage soon.
Be a smart student and study like you are taking a mid-term test. It will save you money in the long run.
