Mortgage Interest Rates 101

Posted by Nick Niesen on October 29th, 2010

Many things affect mortgage rates - which is why they fluctuate. So it pays to understand a little about how mortgage interest rates are generated. The more you know about the economic factors that change rates, the more prepared you are to find the perfect home loan at an interest rate that's perfect for you as well.

Market Conditions
When the Federal Reserve Board raises or lowers rates, there is usually an impact on the rate you will get for your fixed rate home loan, although it's not as direct as it may seem. The Federal Reserve adjusts federal funds rate, which is the rate at which banks lend to each other. When federal funds rate decrease, we spend more, which can actually increase inflation. Mortgage rates tend to be longer-term rates that are affected by concerns about inflation, as well as other economic indicators like job growth. So it's more accurate to say that mortgage rates are indirectly affected by the Federal Reserve Board, and more directly affected by what happens every day in active public markets. The market sets the interest rate, and then a margin is added to the index to determine your final mortgage interest rate.

Timing
Since interest rates change daily, the longer a lender locks in a rate, the higher the risk that the market will move against them. Therefore, you pay more (in points) for a longer guarantee. If interest rates appear to be on an upswing, it makes sense to lock in your rate. If they are steadily dropping, it makes sense to float your interest rate so that you can take advantage of a shorter lock-in period, saving you money.

Points
You can often receive a lower mortgage interest rate by paying extra points - mortgage costs that are up-front rather than built into the interest rate. Each point equals one percentage point of the total amount of the loan. For example, one point on a $100,000 loan is the equivalent of paying $1,000 to ensure you get a lower interest rate that saves you money over the life of your loan.

Credit and Payment History
A less-than-perfect track record may make you seem like a high credit risk, which means you'd only be eligible for higher mortgage interest rate loans. If you find yourself in this position, don't worry - we have loans that could still help you make your dream a reality.

Credit and Payment History
A less-than-perfect track record may make you seem like a high credit risk, which means you'd only be eligible for higher mortgage interest rate loans. If you find yourself in this position, don't worry - we have loans that could still help you make your dream a reality. Learn more about Bad Credit Loans.

Debt-To-Income Ratio
Your monthly debt obligations are calculated against your current income. The higher the ratio, the higher the risk which could mean a higher interest rate.

Loan-to-Value
The loan-to-value is the amount you need to borrow versus the value of the home you want to buy. The more equity you have or the more money you give as a down payment decreases a lender's risk, often resulting in a lower rate for you.

Property Type
Lender risk plays a big part in your rate. For instance, a loan for a single-family home is less risky than one for a multi-family home because there are fewer variables. The less risk, the better the rate.

Occupancy
If you plan on living in your new home, you will probably get a better rate versus a loan on a rental unit, which carries more risk for the lender.

Loan Amount
The amount of money you borrow could affect the interest rate you get.