Why Mortgage Rates Fluctuate

Mortgage rates fluctuate as a combination of public, private and personal credit concerns. There are some factors that affect all borrowers across the board. Other factors will be the result of your personal loan application, and these will only come into play on your individual home loan. Consider the range of factors when you are wondering whether it is a good time for you to buy a home.

Public Factors

The federal government works to make home loans affordable given the current market situation. There are a number of ways the government does this, the most notable being setting the prime interest rate. This is the rate banks charge each other for borrowing, and a low prime rate will traditionally lower interest rates for individual borrowers down the line. The government may also introduce incentives for home buyers to save money on loans. For example, the Federal Housing Agency guarantees private loans for qualified borrowers. In a bad economy, the FSA may lower its standards to do so. Another way the government makes home ownership affordable is through tax incentives. Depending on when you are purchasing, there may be different rebates to offer you an incentive to purchase a home.

Private Factors

The private lending market is affected whenever the economy moves up or down. Private lenders lose a lot of money in a recession when people default on their loans. Further, they have funds invested in the stock markets that disappear rapidly in a down market. Because private lenders lose money, they are less likely to take risks in the future. They will not be as willing to extend private loans to borrowers who do not have a strong assurance against default. Lenders may choose to ask for larger down payments. Even though the national prime rate is potentially low, lenders will assess larger interest rates from borrowers in the future.

Personal Factors

Attractive borrowers will be less affected by market swings than high risk borrowers. If you are able to provide a solid loan application, you will get a better interest rate, regardless of when you are borrowing. Some factors that affect your personal loan application include:

  • Credit score and history - The first criteria any lender considers with a loan rate is your credit history. If you have a good score, over 750, and a history of paying off several installment loans, you will have a better chance at a competitive mortgage rate.

  • Down payment - Buyers who can place a 20% down payment will have a number of advantages on their loan. The interest rate will be lower, and they will also be able to avoid purchasing mortgage insurance.

  • Collateral - If you have an asset to secure your home loan with, even partially, you will be able to get a lower interest rate. Most people secure their mortgage against the home itself. Others provide additional collateral in the form of a vehicle or other valuable object.

  • Income - All applicants on your mortgage documents should be gainfully employed. High salaries reduce the risk of default, making your loan cheaper.