How is my Mortgage Rate Calculated?

A mortgage is the largest financial transaction the vast majority of people will ever make. A huge part of deciding which lender or mortgage to choose is the loan’s interest rate. but how is such an important element calculated? We’ll help explain some of the factors that go into why homebuyers get certain rates and the ways they can and cannot influence their rate.

Factors you have some control over

Factors you can control when it comes to getting a good rate are your credit score, down payment, the type of loan you choose, and the lender you choose. Lenders don’t want to make a bad investment with someone unable to pay the loan, so riskier candidates usually see higher rates.

Your Credit Score: Those in the 740 range has the widest array of loan choices and get the best rates. The rates go up in phases those in a range of 700-739 see the next bump in rates, then 620 to 699 see another bump. For those with a 620 score or under, it can be tough to get a loan that isn’t government-backed.

Your Down Payment Amount: Your down payment influences your mortgage’s loan-to-value ratio. A loan-to-value ratio (LTV) is created by dividing the appraised property value by the mortgage amount. Most lenders offer their best rates to those with an 80% LTV (a 20% down payment). To lower the mortgage amount and better your rate, have a higher down payment.

Loan Type: Whether you choose an Adjustable Rate Mortgage (ARM), Fixed Rate Mortgage, 15-year terms, or 30-year terms can influence your rates and how much interest you will pay over the life of the loan.

Differences Between Lenders: Not all lenders will offer the same rates. Some are more willing to take risks and work with clients. Others may not be willing to show flexibility in their terms. It’s important to choose a lender willing to work with you every step of the way.

Factors you can’t control

Unless you hold significant power in the legislature or stock market, you have little control over the economy. The factors of inflation, unemployment, and the actions of the Federal Reserve can influence or predict a shift in mortgage rates.

Inflation: Inflation brings higher interest rates since the dollar loses its buying power. Lenders use higher interest rates to compensate for this shift.

The Economy: When jobs are up and the economy is booming, rates tend to be higher to reflect the thriving market. Conversely, when the economy is struggling and unemployment is high, rates tend to be lower.

The Federal Reserve: While the Fed doesn’t set mortgage interest rates, it does set short-term interest rates based on its view of the economy. Since mortgage rates are determined the same way as short-term interest rates, these rates will usually shift in tandem.

More Questions? We Can Help

Choosing which loan is right for you and understanding interest rates can be a little confusing. We’re here to help you feel confident about your decision and answer any questions you may have. We want you to have the loan and property that is best for you and your situation. Contact us at teamfleck@fairwaymc.com and we can help you get a great loan at a great rate.