4 Factors that Affect Your Mortgage Rate
When the Federal Reserve Board is the agency with the authority to regulate monetary policy. When the Fed determined that the rise in inflation in 2021 was not “transitory,” it began to raise the prime rate to curtail inflation. The prime rate is the foundation upon which mortgage lenders base the mortgage rate; as the prime rate rose, so did the mortgage rate.
The rise in the mortgage rates, along with higher home prices and an uncertain job market, served to lower the real estate sales rate; the home sales rate dropped 19.9% over last year.1 Home buyers can now take more time with purchase decisions that affect their family budget for the next 15 to 30 years.
However, some purchasing decisions cannot be put off, even with a mortgage rate at a 20-year high. A change in job location or family size might necessitate an immediate real estate purchase. While you cannot reclaim the mortgage rate of 2020, there are a few factors to focus on to reduce the Mortgage Rate as much as possible.
Factor One: The Correct Type of Loan
Most borrowers are familiar with conventional loans offered by banks and savings and loan companies. Your real estate agent will be familiar with a variety of specialty loans, including USDA, VA, and FHA loans. Not everyone qualifies for these loan options, but since they typically offer lower mortgage rates, they are worth considering.
Factor Two: The Down Payment
Does “skin in the game” sound familiar? A mortgage lender often assumes the lion’s share of the risk; if a borrower defaults, the lender’s money is tied up for a long while. When the borrower relieves the lender from a larger portion of the risk, generally, it results in a lower interest rate. If your move includes the sale of a home, reinvesting the home equity you have built up over the years into the new home will work in your favor with a lower rate.
Factor Three: A Great Credit Score
No one relishes public scrutiny, but we all know that all purchases made on credit are recorded, compiled, and scored. The payment disciple used on past purchases is a good indicator of how seriously a borrower will take payments on future purchases. Since a lender is counting on prompt, steady payments, they generally offer the lowest mortgage rate for borrowers with the best credit score. Anything you can do to improve your credit score can improve the mortgage rate a lender offers.
Factor Four: The Length of Loan
Remember, the lender is risking money for the term of the loan, and assuming that the sum total of the capital, plus interest, will be paid on time for the designated months of the mortgage. The interest rate will also vary with the term of the loan; the shorter the term, the better the rate, and vis versa. Popular loan terms for residential mortgages are 30 years and 15 years; if a borrower can handle the shorter term, the interest rate will be lower.
The interest rate remains high and no one can clearly predict its rise or fall. The Federal Reserve Board will be eager to lower rates if they determine the rise in inflation warrants the change. In the meantime, your real estate agent can help you chart a course toward the best purchasing decisions available.