What Influences Your Interest Rate (And What YOu Can Actually Control)

 

What Influences Your Mortgage Interest Rate (And What You Can Actually Control)

After more than 30 years helping buyers and sellers across the Phoenix metro area, the question I hear most is some version of “Why is my rate what it is?” Rates can feel like they move at random, but they don’t. Some factors are national and out of your hands. Others are personal, and you can improve them. Here is how it breaks down.

The Big-Picture Forces

The Federal Reserve

Many people assume the Fed sets mortgage rates. It doesn’t. The Fed sets the federal funds rate, which is what banks charge each other for overnight loans. Mortgage rates don’t follow it one-for-one, but the Fed’s moves and its signals about the future shape the mood of the whole lending market.

The 10-Year Treasury Yield

If you want one number to watch, this is it. Mortgage rates tend to move in the same direction as the 10-year Treasury yield, usually sitting a bit above it. When investors buy more Treasuries, yields fall, and mortgage rates often follow.

Inflation

Lenders and investors want to earn more than inflation, so when prices rise quickly, mortgage rates tend to rise too. Cooling inflation usually gives rates room to ease.

The Economy and Jobs

Strong job numbers and robust growth can push rates up. Signs of a slowing economy often pull them down, because investors move money into safer bonds.

The Mortgage Bond Market

Most mortgages are packaged into mortgage-backed securities and sold to investors. What those investors demand in return directly affects the rate a lender can offer you. This is why rates can change from one day to the next, and sometimes more than once in a day.

The Factors That Are About You

This is where you have real influence.

Your Credit Score

This is the biggest personal factor. A higher score tells the lender you’re a lower risk, and that earns a better rate. Even a modest difference between score tiers can change your rate and your monthly payment.

Your Down Payment and Loan-to-Value Ratio

The more you put down, the less the lender has at risk. A larger down payment can lower your rate, and it can also reduce or eliminate mortgage insurance.

Your Debt-to-Income Ratio

Lenders compare your monthly debt payments to your gross monthly income. The lower that ratio, the more comfortably you can handle a mortgage payment, and lenders reward that.

The Loan Type and Term

A 15-year loan usually carries a lower rate than a 30-year loan, though the payment is higher. Fixed-rate and adjustable-rate loans are priced differently, and FHA, VA, USDA and conventional loans each have their own pricing.

The Property and How You’ll Use It

A primary residence typically gets a better rate than a second home or an investment property. Condos and multi-unit properties can be priced differently from single-family homes.

Discount Points

You can pay points up front to buy your rate down. It can make sense if you plan to stay in the home long enough to recoup the upfront cost, so it’s worth running the numbers before deciding.

Your Lock Timing

A rate lock protects you from increases between your offer and your closing, usually for a set number of days. When you lock, and for how long, can affect the rate you’re offered.

What You Can Do Right Now

• Check your credit reports and correct any errors well before you apply.
• Pay down credit card balances to improve your score and your debt-to-income ratio.
• Avoid opening new accounts or making large purchases before closing.
• Get quotes from several lenders. Offers can differ more than you’d expect, and comparing them is free.
• Compare the APR and total costs, not only the advertised rate.
• Think about how long you plan to stay in the home before choosing between points, loan terms and rate structures.

Don’t Try to Time the Market Perfectly

Nobody can reliably predict where rates are headed, and waiting for the “perfect” rate can cost you in other ways, like rising home prices or missing the right home. A better question is whether the payment fits your budget and your goals. If rates drop later, refinancing may be an option.

Let’s Talk Through Your Numbers

Every buyer’s situation is different. If you’re thinking about buying or selling anywhere in the Phoenix metro area, I’m happy to walk through what your options look like and connect you with trusted lenders who can give you an accurate quote.

David Thomas, HomeSmart Realty