When it comes to knowing the mortgage rate some elements are under control and some aren’t. The mortgage interest rates have a big importance on the total long-term cost of buying property by financing. The mortgage borrowers are looking out for the lowest possible rates and the mortgage lenders have to take care of the risk via the chargeable interest rates.
The factors affecting the mortgage rates can be bulleted to five points all of which show the basic rules of supply and demand in one or the other form.
1.Inflation—The upward gradual movement of prices because of inflation is a very important factor in the total economy and a very important factor for mortgage lenders. Inflation has the power to curb the purchasing power of dollars in time. Mortgage lenders have to maintain interest rates at a level sufficient to overcome the erosion of the purchasing power by inflation and make sure that their interest returns will bring them real net profit.
2.The level of economic growth—The economic growth indicators like gross domestic product(GDP)and the employment rate also influence mortgage rates. The higher economic growth levels generally produce higher incomes and higher levels of consumer expenditure which includes more consumers wanting mortgage loans for home purchases.
3.Federal Reserve Monetary Policy––The monetary policy pursued by the Federal Reserve Bank is one of the most important factors which influence both the economy and interest rates including the mortgage rates. The Federal Reserve does not set the specific, exact interest rates in the mortgage market.
4.The Bond Market—The banks and the investment firms market mortgage-backed securities(MBSs) as investment products. The yields obtained from these debt securities must be properly high to come in the eye of buyers. It is from the fact that the government and corporate bonds offer competitive long-term fixed-income investments.
5.Housing Market Conditions—The ongoing trends and conditions in the housing market also affect mortgage rates. When there were fewer homes being built or offered for resale there was a decline in home purchasing which led to a decline in the demand for mortgages and thus interest rates were plunged downwards.
Factors that can be controlled to determine the mortgage rate
The lenders adjust the mortgage rates depending on how risky the loan is going to be. If the loan is riskier the interest rate will also be higher. When the lender has to judge the risk factor involved he will consider how much likely it is for a customer to fall back on payments or stop making them totally and how much money the lender can lose if the loan goes bad. So here the main factors are credit score and the loan-to-value ratio.
1.Credit Score–The lowest and best mortgage rates apply to borrowers with credit scores of 740 or more. These borrowers have the broadest choice of loan products. The interest rates are higher for borrowers with credit scores of 700 to 739. For borrowers with a credit score from 620 to 699, the mortgage rates are higher still. These borrowers may find it difficult to get higher amount loans.
2.Loan-to-value ratio- The loan-to-value ratio measures the mortgage amount as compared to the home’s price and value. If one purchases a house for $100,000, puts $20,000 down and gets an $80,000 mortgage then he’s borrowing 80% of the home’s value and the loan-to-value ratio is 80%.
Factors that cannot be controlled to determine the mortgage rates
The overall level of mortgage rate is set by the market forces.The mortgage rates move up and down easily based on the current and expected rates of inflation, unemployment and economic indicators.
1.Overall economy–The mortgage rates rise when the outlook is towards fast economic growth, higher inflation and low unemployment rate. The mortgage rates tend to fall in a slowing economy, falling inflation and a rising rate of unemployment. These economic signs don’t always say the same things.
2.Inflation-The rising inflation is followed by rising interest rates because when the prices go up the dollar loses it’s buying power. And the lenders demand higher interest rates as a compensation.
3.Job Growth–The job growth has in the time of the Great Recession shown signs of an expanding economy with higher wages and rising rates of interest. But according to the Department of Labour economic growth has been inconsistent, the weekly wage growth has remained low followed by mortgage rates.