Currently, mortgage rates are at an all time low, however, there is still a big difference with even slight changes in your mortgage rate. We dig into factors, you can control, that determine your mortgage rate and calculate your payments.
Even with the Coronavirus going around, people are still buying and refinancing their homes. Numbers have slowed slightly, however, in competitive markets, this gives more people an opportunity of home ownership that didn’t have it before.
One thing you need to be mindful of is mortgage rates, which is simply the interest rate you pay to your lender on the loan you took out to purchase your home.
What determines the interest you get on a mortgage? And how much does 1 percent really affect the amount you pay?
In a quick example, a 1 percent difference in your mortgage rate on a $150,000 home with a mortgage of $120,000, increases your monthly payment by almost $75 a month. While this may not seem like a lot, over the course of 30 years this is roughly $27,000!
You can use Zillow’s mortgage calculator to run through different scenarios that fit what you are looking for. Also be sure to check out the latest mortgage rates on Bankrate, to get a better understanding of where they are at.
Let’s now dig into the factors under your control that determine the mortgage rate you receive from your lender.
Main Factors to Determine Mortgage Rates:
Just like any other loan that uses your credit score to determine rates, a mortgage is no different. Your credit is one of the biggest factors when determining your mortgage rate.
To qualify for the best mortgage rates, your credit score typically needs to be 760 and above. However, if you are between 700-759, you will still qualify for very competitive rates. Check out the chart below to get a good understanding of how your credit score affects mortgage rates.
The standard down payment for a conventional loan is around 20 percent. This is because you are able to avoid private mortgage insurance and lenders see you as a lower risk for having a higher stake in the property. For that reason, you will get better mortgage rates on your loan.
If possible, try to put down at least 20% if you are using a traditional mortgage to receive the best mortgage rates.
Points on a mortgage are fees paid directly to the lender at closing to receive a lower mortgage rate.
This is known as “buying down your rate.” One point is equal to 1 percent of the total mortgage. For example, if your mortgage is $100,000, one point would be equal to $1,000.
In general, the longer you own a home, the more points help you save on interest over time. However, you need to be careful because if you don’t own your home long enough, the points paid up front will outweigh the interest savings over that time frame.
Check out the example below to see how points can help reduce your total payment over time.
Income is another important factor to determine the risk a lender is taking by loaning to an individual – in turn affects your mortgage rates.
If you are self-employed, just changed jobs, or have less than two years of work history, you are not as likely to get the best mortgage rates.
The more stable your financial position and consistent your income, the less risky you are in the lenders eyes. Even if you own a successful business, you are still seen as a higher risk because you have more to lose. Therefore, you may not get as good of mortgage rates.
There are many different types of mortgages you may qualify for that affect your mortgage rates. Some examples include, traditional financing, FHA loans, and VA loans. Each will have slight differences in mortgage rates. Speak with your lender to go over which option is right for you.
Moreover, the longer you have a loan out, the higher mortgage rates you will receive. There is more risk involved for the lender having a loan out for 30 years compared to 15 years. Most of the time you are able to get better mortgage rates with a 15 year loan over a 30 year loan.
The type of property you are purchasing can also affect your mortgage rates. Some different types of properties include: single-family, multi-family (2-4 units), condos, mobiles homes, and co-ops.
When shopping for a home, be aware the type of property you are purchasing can affect your mortgage rates.
Along with the type of property, the area you plan on buying in can affect your mortgage rate. This varies state by state and it is usually based on how well the housing market is doing in your state.
The better your area is doing, typically the lower mortgages rates will be because lenders don’t have as much risk.
Factors you Can’t Control with Mortgage Rates
Above are the factors you personally have control over when receiving mortgages rates, but what about the factors out of your control?
Mortgage rates move up and down daily based driving economic forces. These include:
- The overall Economy: Mortgage rates typically rise when the economic outlook is positive (Fast economic growth and low unemployment) and fall when the economy is slowing down.
- Inflation: As inflation rises, interest rates typically follow. This is because when prices go up, the dollar has less buying power, and lenders require higher interest rates to compensate for this. When inflation is low, interest rates typically fall because the dollar has more buying power.
- Job Growth: Mortgage rates and job growth may not be as clear as they once were, since 2010. However, the monthly employment survey is still one of the mortgage industry’s closely-watched economic reports. This is because the Federal Reserve makes decisions based on “maximum employment.”
- Other Factors: Besides inflation and employment, mortgage investors pay attention to retail sales, home sales, housing starts, corporate earnings, and stock prices. These factors all play a role in mortgage rates as well.
What Mortgage Rates are Currently Doing?
If you’ve paid attention to the real estate market at all over the past year, you’ve probably heard that interest rates are at an all-time low.
Over the past month, the Coronavirus pandemic has pushed interest rates even lower. The Federal Reserve is implementing many tactics to combat the uncertainties of the pandemic and recently they have lifted their cap of $200 billion on purchasing mortgage-backed securities. The FED will now be a huge new buyer of mortgage-backed securities, increasing the demand, which will lower mortgage rates.
Without getting too bogged down in all the details of current mortgage rates, historically they are extremely low. Back in the 1980s, mortgage rates fell between 10 and 18 percent. These days, over 4 percent is looked at as a high mortgage rate.
Still, there is a big difference between 3.5 percent and 4.5 percent and you’ll want to pay attention to current mortgage rates if you are in the market of buying a home.
Now let’s dive further into the effects of a 1 percent difference in mortgage rates
Below is a table that shows how much of a difference 1 percent makes in mortgage rates for different mortgage amounts.
A one percent difference might not seem like a lot on a monthly basis, however, over the course of the loan it adds up to be significant. On a $50,000 mortgage amount, the monthly difference of 1 percent in mortgage rates is around $60 a month. Over a 30 year mortgage, that is $8,984.
On a $600,000 mortgage amount, the monthly payment difference for 1 percent is $716. That is around $107,804 more, for a 1 percent increase in your mortgage rate over 30 years.
Bear in mind, these numbers above only include principal and interest numbers. They do not include property taxes, insurances, HOA fees and other expenses which will also affect how much your monthly payment is.
Regardless, just looking at principal and interest numbers, it is clear to see how much of a difference 1 percent in mortgage rates can make.
Mortgage rates play a huge factor in the overall housing market and how much comes out of your pocket each month. You may not have realized that 1 percent in your mortgage rate can have a significant impact on your total interest expense over the entire course of your mortgage.
You now know the factors that affect your mortgage rates and many of them are in your control. The next time you plan on buying a home, take into consideration these factors in order to save thousands of dollars over the course of your loan.