What Determines Mortgage Rates?

There are numerous variables that a company will use to determine their mortgage rates, and no two companies are going to necessarily compute their mortgage rates exactly the same.  However, by taking a look at a few of the common factors, you can get an idea about what to expect for your mortgage rate.

The Current Economy

The state of the current market, along with the projected market, plays a major role in deciding what today’s mortgage rates will be. Typically, as inflation increases, average mortgage rates increase. What happens is that the Federal Reserve Board lowers rates, causing the average person to spend more. This increased spending increases inflation, which in turn seems to increase mortgage rates.

The other major factor in the general economy that determines rates is future market projections. Treasury Bonds (specifically, the 10 year note), seem to have a direct correlation to mortgage rates, such that you can generally judge about what to expect a mortgage rate to be based on current rates for Treasure Bonds.

Your Financial Status

Your own financial situation is going to have the largest effect regarding what your mortgage rate will be versus what your neighbor’s mortgage rate is. First and foremost, lenders are going to look at your credit history. If you have little to know credit, or at least no “stable” credit, you may find it difficult to get a mortgage at all. For those with a poor credit history, showing that they have frequently been late on debt payments in the past for things like credit cards, car payments, etc., they will be viewed as a high risk for a mortgage. Basically, the worse your credit score, the higher the risk they see you as, and the higher the mortgage rate is going to be in order to make lending to you worthwhile for them.

However, there is a built in way to essentially “buy” a better mortgage rate through a point system. Basically, 1 point costs the amount of 1% of your loan. So if you are borrowing $100,000, then 1 point will cost you $1000. For every point you have (in this case, for every $1000 paid up front), you will lower your interest rate by 1/4 of a percent. Just remember to do the calculations to ensure that however much money you put in up front, you’ll save at least as much or more in total interest. To find out if its worth it, calculate the cost of the loan for $100,000 with the full interest rate, compared to the coast of the loan for $96,000 with an interest rate that is 9% less (this is if you had 4 points).

Still, to find out exactly what your mortgage rates will be, you will need to talk to various mortgage lenders.