Understanding current mortgage rates and how your unique rate will be calculated can be confusing and overwhelming. This is especially true for first-time homebuyers.
Still, mortgage rates and how they work are important concepts to grasp. After all, buying a house is probably the largest financial transaction most people will ever enter into. You’ll be paying off your loan for decades in most cases, so obtaining the absolute lowest rate possible is in your best interest.
Here are ten tips for understanding current mortgage rates and how your rate will be calculated.
Factor's In The Economy
1. Mortgage rates are largely determined by the 10-year Treasury note.
We’ll start with the most confusing thing about mortgage rates: They are largely dictated by something called 10-year Treasury notes.
These are essentially loans made to the United States government, which mature in 10 years and produce a variable yield, depending on demand.
Over time, yields on these loans rise and fall — again, depending on demand. This fluctuation will also indicate whether mortgage rates rise and fall. Essentially, if the yield on the 10-year Treasury note goes down, you’ll see mortgage rates fall. The opposite is also true.
How does this information help you? You can actually track the yield on the 10-year Treasury note. Tracking it on financial sites can help you decide when mortgage rates are at their best.
2. The overall economy will impact rates as well.
When the overall economy is doing well, you can expect higher mortgage rates. A down-turned economy actually means rates will be lower.
Again, this means that you can track mortgage rates by tracking the economy. Look at things like:
- Consumer confidence
- The U.S. GDP
- Job and unemployment statistics
- Home sales
- The Federal Funds Rate
3. The loan purpose matters.
Homeowners and/or homebuyers will be examining mortgage rates for one of two reasons: Either to buy a new home or to refinance a home they've already got a mortgage on.
A lot of first-time homebuyers looking at mortgage rates are years away from refinancing. Still, refinancing is another reason to examine and better understand rates. When you refinance a home, you ultimately want to get a better mortgage rate — either based on your improved financial circumstances or the changing economy.
If you own a home and you’ve been paying your mortgage payments in full and on time, it’s likely that you’ll get a better rate on your refinance than someone would on a new home purchase.
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4. Your home location matters.
Generally speaking, if you're looking to purchase a home that's in a healthy buying market, your mortgage rate is going to be lower. This is because your lender will see the healthy market as a positive indicator that you won't default on your loan.
5. If you make a larger down payment, your mortgage rate will be lower.
As you may know, larger down payments mean lower mortgage rates. This is essentially because lenders will understand that you have a bigger investment (literally) in your home if you stake more upfront. This makes them feel better about loaning you money, which, in turn, will spur them to give you a lower interest rate.
6. If you can make a 20% or higher down payment, that’s always best.
Of course, not everyone can pay 20% down on home. For a $100,000 home, that's $20,000. Most first-time buyers don't have $20,000 lying around.
However, if it's possible for you to make a 20% down payment on your home, you can avoid something called PMI or private mortgage insurance.
Essentially, when buyers put less than 20% down on their home, lenders want to ensure that their investment is safe, so they'll require an extra type of insurance called private mortgage insurance. This protects the lender in the event that you, the buyer, default on your loan. Unfortunately, you have to foot the bill for PMI, so it's an added expense you need to pay.
7. Your debt-to-income ratio is a large rate-determining factor for new buyers.
New homebuyers may be unfamiliar with the home buying process, and that’s okay! A good lender will walk you through the steps.
One of these steps will be to figure out your debt to income ratio, something that can be determined by your credit report.
Your debt to income ratio or DTI ratio is just what it sounds like. It's a percentage that puts your monthly liabilities against your monthly income.
Lenders want to see a debt to income ratio that is usually between 40 and 50%. Your lender can give you a particular percentage point depending on their specific institution. If you have too much debt, this can raise your debt to income ratio, which will subsequently raise your mortgage rate.
8. Your credit score will influence rates as well.
Again, your lender is looking at your credit report to determine how well you'll be able to make your mortgage payments. They will give better mortgage rates to those who seem highly capable of making their payments every month.
Your credit score reflects how well you've been making your payments on things like credit cards and loans in the past, as well as other factors, such as how much debt you have.
Remember that your credit score does not define you. Even if you have an average or less than average credit score, you can improve this rating over time. Ultimately, you want a higher credit score so that you can get better a mortgage rate.
9. Contrary to what you might think, sometimes larger loans carry smaller rates.
The overall amount that you'd like to borrow for your mortgage will influence your mortgage rate as well. Essentially, in terms of loan amount, you'll either have a conforming loan or a jumbo loan.
Conforming loans are for smaller amounts than jumbo loans and generally come with lower mortgage rates. The maximum for a conforming loan is approximately $400,000 - $500,000. If you take out a loan for over this predetermined amount, you’ll likely be taking out a jumbo loan, which will come with higher mortgage rates.
On the other hand, remember that your lender wants to make money off of your loan. Therefore, if you take out a very small loan (for example, one for less than $100,000), your mortgage rates may actually be higher because your lender won't be making much money on interest.
10. Remember: Mortgage rates always fluctuate in eighths.
As a final note to help you navigate the multitude of varied mortgage rates you’re going to encounter, don’t forget that mortgage rates will vary by eighths. In other words, you’re going to see rates that are either whole numbers, like 4%, 5%, or 6%. Or, you’re going to see numbers such as 5.125%, 5.375%, and 5.75%.
Sometimes, you’ll see promotional rates, which end in .99%. These rates and other percentage rates that aren’t calculated by the eighth are APRs, and they factor in extra loan costs.
Understanding current mortgage rates is not easy. This introduction should give you a solid foundation with which to grasp how rates can fluctuate based on the economy — and how personal factors influence rates as well.
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only.
Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.