Borrowers interested in buying a home or refinancing their current mortgage loan often keep a close eye on mortgage rates.
An attractive rate helps you choose your lender to get the mortgage process started.
During the height of the COVID-19 pandemic, you may have noticed that mortgage rates hit record lows. Or if stocks were rising, you noticed that mortgage rates sometimes rose, too. What’s the connection?
Mortgage rates fluctuate daily based on multiple factors, including the overall state of the economy, job growth, home sales, and more. There are also some factors in your control that affect your personal rate.
Let’s dig into the five main reasons mortgage rates move, and which aspects you can control to get the best rate for you.
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1. Economic Factors
Generally, when the economy is booming, mortgage rates are higher.
A strong economy is the result of low unemployment and higher inflation. More people are working, meaning they are making more money and spending more.
On the other hand, when the COVID-19 pandemic first began, the unemployment rate skyrocketed and mortgage rates fell to match the level of demand.
The economy’s health fluctuates every day, which means mortgage rates are always moving. But during periods of dramatic job growth or loss these fluctuations become especially apparent.
Now, mortgage rates are on the rise again as the economy gradually picks up following the pandemic’s impact.
2. Federal Reserve Actions
Contrary to popular belief, the Federal Reserve doesn’t set mortgage rates, but instead is an indirect influencer.
The Fed’s job is to maintain a stable economy and the value of the dollar. If inflation gets too high, it may need to raise its funds rate. This, in turn, can push up other rates as well.
If the economy is struggling, the Federal Reserve will adjust interest rates to create balance. Lowering the rates in response to a struggling economy helps encourage consumer borrowing and spending.
3. Housing Market
If the demand for housing is high, mortgage rates will rise along with the demand.
Since markets vary based on location, you will see higher rates in areas with more growth and demand than you will in areas with less demand for housing.
Many borrowers closely evaluate location to determine where they can find a home that is safe, close to good schools and entertainment, and also is affordable.
Depending on where you live, this could take some time to find the perfect home that checks all your boxes.
4. Mortgage-Backed Securities
Mortgage-backed securities (MBSs) can get complicated, but it’s helpful to have an understanding of how they work because they are the biggest determining factor for mortgage rates.
After a mortgage company crafts a loan, they usually sell it to investors. This regulates cash flow so that the company can continue making new loans.
The investment banks mortgage companies sell the loans to then bundle loans with similar rates together. These bundles are known as MBSs.
When the price of MBSs increase, mortgage rates will drop, and when they decrease, the rates will rise.
5. Borrower’s Financial Situation
Finally, your personal financial situation influences your mortgage rate. As a result, it’s a factor you can actually control and improve to get a better rate.
Borrowers with excellent credit scores snag the best rates.
A lender will adjust your rate based on risk. Risk isn’t a judgment about the borrower — it’s based on several calculated factors that reveal whether you are likely to repay your loan on time.
Credit scores range from 300 to 850, and are broken down in the following way:
- Excellent scores: 740 to 850
- Good scores: 700 to 739
- Average scores: 640 to 699
- Below average scores: below 639
You still can qualify for a loan with a low score, but you will most likely get a higher interest rate.
LTV Ratio and DTI Ratio
Besides your credit score, other factors include your loan-to-value (LTV) ratio and debt-to-income (DTI) ratio.
LTV is the mortgage amount compared to the home’s value, and DTI measures your monthly debt payments vs. your monthly gross income. These factors all reveal to lenders how well you have saved for a home, and how well you manage debt.
If any of these factors result in a higher mortgage rate than you’d like, you can take some time to pay down your debt and create some savings before trying again for a loan with a better rate.
Get Your Best Mortgage Rate
Finding the best mortgage rate can make a huge difference in how much you pay over the life of your loan. The right mortgage lender will work with you to make sure you are getting the most affordable loan.
Apply today with the experts at River City Mortgage.
We want to help you build a strategy to make your home as affordable as possible.