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If you’re buying a house, you’ll soon see that mortgage interest rates have a big effect on your monthly payment. The higher your interest rate, the higher your payment. Even a half-percent higher interest rate can equate to spending hundreds of dollars more on your house payment every year.
It helps your current budget and your future finances to secure the lowest mortgage interest rate possible. After all, you’ll likely be making that payment for 15, 20, or even 30 years. It pays to understand the factors, both within and outside of your control, that determine mortgage rates. Here’s the scoop.
Mortgage Interest Rate Factors Within Your Control
- Your Credit Score
If you’ve managed your finances wisely, you’ll have an excellent credit score and be rewarded with better rates than if you’ve run up your credit cards and paid your bills late. A high credit score equates to lower risk, making lenders more eager to work with you. If you’re buying a house, take action to boost your credit score. - Your Debt-to-Income (DTI) Ratio
Lenders look at this ratio to determine your credit worthiness. They take your total monthly debt obligations and divide them by your gross monthly income to calculate your DTI. The lower your DTI, the lower your mortgage rate will be. If your DTI is 35% or lower, you should qualify for the best rates. - Your Loan-to-Value (LTV) Ratio
Another important ratio in determining mortgage rates is the loan-to-value ratio. Paying a hefty amount down gives you more of a chance of landing a low mortgage interest rate because it helps your LTV ratio.To calculate an LTV ratio, subtract the down payment from the home price to get the amount you are going to finance. Then divide that number by the home price. Typically, a “good” LTV ratio is anything below 80%.
- Type of Mortgage You Choose
There are lots of mortgages in the marketplace. Some of them are specifically for first-time homebuyers or veterans. There are fixed rate loans, adjustable rate loans and conventional loans, just to name a few.All loans vary slightly in the rates they offer. If you choose a conventional fixed mortgage, you might pay a different rate than if you go with an FHA loan. Make sure to discuss your loan options with your loan officer, so you can make an informed decision.
- If You Pay Down Points
Sometimes borrowers choose to buy down points to snag a lower interest rate. Doing this requires the borrower to pay a percentage of the mortgage amount. One point costs 1 percent of the mortgage amount and usually decreases the mortgage rate by .25 of a percent. Keep in mind the results of buying down points may vary based on the trending interest rate climate and the mortgage program you choose.
Mortgage Interest Rate Factors Outside of Your Control
- Inflation Rates
Inflation reduces the dollar’s buying power. This can cause mortgage rates to go up. If you’re buying a housing during a period when inflation is high, you’ll most like pay higher mortgage rates. - The Federal Reserve
The Federal Reserve raises and cuts short-term interest rates. It bases its actions on different factors happening in the economy. These rates generally drive increases and decreases in mortgage interest rates. - The Job Market
When the job market is booming, there’s more money in many people’s pockets. This economic boost may send interest rates up. In contrast, during periods where unemployment is high, the interest rates may go down.
If you need a mortgage to buy a house, it’s important to understand the factors that determine the mortgage interest rate you will qualify for. Your loan officer can explain in greater detail how mortgage rates are determined and lay out options for securing a mortgage loan with the best possible terms for you.
