When it’s time to get a new mortgage, a key number is your interest rate. This number will play a large part in determining how much you have to pay back over the course of the loan, however long that may be. You’ll notice the available rates fluctuating often, even changing from one day to the next. This raises some questions: What factors go into these available rates? What’s the connection between the Federal Reserve lending rate and your mortgage rate? What can you do to get the best rate?
The Fed’s (limited) influence
While the Federal Reserve – the central bank of the United States – sets its benchmark, it is creating a target rate for borrowing federal funds. This doesn’t directly impact the interest rates for mortgages. Indeed, Bankrate offered a reminder that mortgages are one of the financial products least affected by Fed rate changes.
Bond investors’ decisions are the prime mover behind mortgage rates – these take some influence from the Fed, but it’s not everything. When the Fed raises its rates, mortgage rates sometimes drop, though most other kinds of loans will become more expensive. This is due to the fact that investors don’t worry much about inflation when Fed rates are rising. Mortgage rates also tend to rise when stocks are up and unemployment is low.
Many individual factors affect rates
The rate available to you at any given time is based on more than national trends. In addition to differences based on local housing markets and demand, the details of your application will determine your unique rate.
To begin with, there’s the choice between a fixed-rate or adjustable-rate mortgage. The former type will always reflect the interest market as it stood when you applied for the loan, and is therefore a perfect choice for periods of low rate offerings. The latter variety will typically start low, remaining at that amount for a limited amount of time before adjusting annually based on current market conditions.
The Consumer Financial Protection Bureau noted a few personal financial details that can further impact your rates. Your FICO credit score is one of these variables, meaning you should avoid actions that can lower your credit in the run-up to a mortgage application, such as securing another large loan or opening a new line of credit. Furthermore, making a larger down payment is a way to yield a better interest rate over time.
Working with your First Centennial Mortgage loan officer and finding the ideal loan product for you will determine the total price tag of the mortgage. Interest rates, closing costs and items such as insurance will combine in unique ways for every combination of property, region and chosen loan product. Making this calculation is an important step on the road to homeownership.
Do you have more questions? Contact the loan officer who shared this blog post or send us a message.