You may have heard that interest rates have been going at a steady decline as of late, which is giving potential buyers much more encouragement and incentive to buy homes now while the rates are low. How do interest rates work when it comes to a mortgage? We’ll give you a little, brief rundown.
Mortgage interest rates are a crucial factor in figuring out whether or not you are able to afford to buy a home in your current financial situation. The rate you are given by your mortgage lender ultimately affects the exact amount you are going to have to pay each month to pay off your mortgage. However, did you know that depending on the person, mortgage rates could vary?
Mortgage interest rates on the market are determined by multiple factors and the main influencer is by mortgage aggregators. Mortgage aggregators are third-parties that buy your newfound debt from your mortgage lender. Your mortgage lender doesn’t want to hold on to your debt in-house, so these third-parties bundle up your expenses into mortgage-backed securities. You may have heard of Fannie Mae and Freddie Mac, or, The Federal National Mortgage Association who take on the important role in the nation’s housing finance system by buying mortgages and packaging them into those mortgage-backed securities. These packages are then sold as shares by investors.
This is important to understand because this is how your mortgage interest rates are determined and it all boils down to simple economics supply and demand. Factors such as the price at which your debt is sold to these aggregators and the price at which investors are willing to buy these shares will ultimately influence interest rates. Other economic factors that go into the buying and selling of mortgage-backed securities are the Federal funds rate which is the rate that banks are allowed to borrow money and the rate of inflation. If the economy is weak, the Federal funds rate is lower and when it is strong, the rate is higher. Mortgage lenders must then charge accordingly to their borrowers in order to cover those costs. As for the inflation rate, when the prices for both goods and services are on the rise, mortgage-backed securities are less appealing to buy because investor's returns will be lower by the time they earn their money back.
Now, what does this all mean to you personally when it’s your time to get a mortgage rate from a lender? While the market mortgage interest rates will be the main influence, there are other factors (which you will have control of) that will ultimately help determine the final rate. The factors that can influence your mortgage rate are your credit score, declaration of bankruptcy, your income, your employment, your debts, your assets, the amount needed for your down payment and the specific type of loan you are applying for. If those factors make you a higher risk to an investor, the higher your interest rate will be.
Sorting out your financials is a huge first step to the home buying process and will be the ultimate determining factor on figuring out what type of home you can afford and will help you figure out your price range before house hunting.