There are numerous factors that can potentially affect the amount of interest that you’re going to pay for mortgaging a house. You can easily increase your chances of obtaining the best available rate of interest through satisfactory financial documentation that supports your assets and income, maintaining your existing credit card balance at a minimum along with the option of a down payment. Mortgages are an investment and you will have to work hard in order to be able to pay the lowest interest rate possible, though this will include a bit of shopping around prior to signing the final documents.
Mortgage rates are determined through an intricate set of monetary factors featuring the position of secondary markets, federal intervention, the housing market, investor demand, and other aspects.
Investor Demand
As mentioned before, a mortgage is a kind of investment for an investment firm or the investor. If the investors are provided with various other opportunities that are more valuable towards leveraging their money by the marketplace, mortgage rates will have to increase in order to attract further investors. There are many cases where the returns that the mortgages have to offer are higher than other bonds and stocks along with comparative security.
Inflation and Deflation
Mortgage rates are greatly affected by inflation and deflation across the board, though inflation is much more common than deflation. That’s because inflation investment value is eaten away by inflation, and mortgage owners look at liens as a kind of an investment. Thus, mortgage rates rise when the financial system inflates.
Secondary Market
The secondary market also affects mortgage rates quite strongly. When the customer borrows from a bank or a mortgage broker, the loan is sold over the secondary market, grouped with others. This market comprises of investment bankers and investors who pay money for securities that are backed by securities. Large institutions like Freddie Mac, Fannie Mae, and others purchase these in bulk. Once these loans are bought, the secondary market transforms them into funds or securities, which are later bought by large investors at an institutional level.
Your Credit Scores
One of the factors which directly impact the rate of interest offered to you on a mortgage is your credit score. If this score is somewhere between 760 to 850, then you can easily get your hands on the most suitable interest rates while looking for a home loan. However, if your credit score is lower than 620, you will be considered as a subprime borrower – you’ll be offered mortgage interest rates that are significantly higher in comparison to the prospective borrowers with superior credit ratings. Once your credit score has dropped lower than 500, you’ll be quite unlikely to be considered for a mortgage anytime soon.
The Government’s Role
According to the World Report and U.S. News, the Federal Reserve, along with various government agencies can be regarded as partially responsible in influencing the interest rate of mortgages. At times, the interest rates on mortgages decline when long-standing U.S. Treasury debts or securities are purchased by the Federal Reserve in order to lend a hand to the economy. For instance, regardless of the global fiscal crisis that’s been active since the year 2010, mortgage interest rates (the best ones available) were at almost a record low of around 4.5%.
Mortgage Loan Type
Mortgage loan types also affect the rate of interest that you’ll have to pay over the years. ARMs or Adjustable-Rate Mortgages have variable interest rate requirements within their contracts. Hence, the lender could lawfully change the owed interest over the mortgage because of the global fiscal conditions. Though this legal practice is not recommended financially, according to the Federal Trade Commission, it has forced a number of homeowners towards foreclosure as they were unable to deal with the abrupt increase within mortgage payments.
Fixed rate mortgages are the best option for homeowners as they offer a steady rate of interest over the loan. There are some lenders who suggest hybrid ARMs – these combine fixed rates and adjustable rates. Hybrid ARM contracts define the time span during which you’re liable to experience fluctuations in the interest rate.
Keeping track of the trends in mortgage rates and predicting their increase or decrease is not an easy task. However, in order to make the right and informed decision regarding your investment, you will need to do a bit of research, i.e. you’ll have to get in touch with a lender and learn about ways in which you can identify the finest mortgage rates.