The mortgage rate is usually the key factor mortgage borrowers look at before applying for a home mortgage. Mortgage rate is defined as “the standard interest rate given by mortgage lenders” and “the rate of interest paid on the mortgage loan expressed as a percentage”. Knowing the lowest and best mortgage rates can help you save thousands of dollars on your mortgage.
Since mortgage rates are a key factor in obtaining a home mortgage loan, it is important for borrowers to find out the current mortgage rates before settling with a mortgage plan. Mortgage rates are seldom steady and are always changing making it difficult to determine if they will go down or up. But, it’s important for those looking for a mortgage to know what the current mortgage rates are and to understand some of the economic indicators that can be used to determine their future direction.
Factors influencing the change in mortgage rates
One major factor that affects mortgage rates is inflation. Inflation is characterized by a booming economy and an increase in the prices of goods and other commodities. When the economy is strong, prices of goods and services rise, signaling the rise of real estate prices, apartment rents, and mortgage rates as well.
When mortgage rates are high, the demand for mortgages and loans slow down. To circumvent this, the Federal Reserve Bureau may lower interest rates. This action will cause inflation to reduce, the economy to slow down, and mortgage rates to fall. As you can see, basically, the dynamics of mortgage rates is directly affected by the rise and fall of interest rates.
Despite the tendency of mortgage rates to follow the direction interest rates, there are also several other factors that can affect mortgage rates. Mortgage rates base their movement on the supply and demand for mortgages and loans. And because the supply and demand ratio of mortgage rates slightly deviates from that of other rates, mortgage rates tend to move differently when occasions arise.
For instance, a lender may have a certain quota in the amount of mortgages he can close in one month. In an attempt to achieve that quota, he may have to reduce the mortgage rates of his products in order to attract more buyers. Even though the market suggests that mortgage rates should be high, reducing his mortgage rates will help him achieve his goal. This is another way of affecting the movement of mortgage rates.
Other Key Factors Affecting Mortgage Rates
Mortgage rates are not only influenced by inflation, the overall status of the economy, and mortgage companies, but mortgage rates are also directly affected by the amount of the money borrowed. As the amount of the loan increases, mortgage rates may rise as well.
Certain standards in the amount of loan money granted were established to keep mortgage rates in control. The two most common standards used in the United States stock market are Fannie Mae and Freddie Mac. Every year, the limits of loan amount is either extended or reduced, depending on how mortgage rates are predicted to move. When the loan money exceeds the limits set by either Fannie Mae or Freddie Mac earlier that year, then the mortgage rate will increase.
Mortgage rates also differ with the type of loan a buyer chooses. A fixed rate mortgage will usually have a higher mortgage rate when compared to the mortgage rate of an adjustable rate mortgage. ARMs or Adjustable Rate Mortgages generally have a very low mortgage rate at the start of the term but payments will also increase as mortgage rate increases over the next period of years. The adjustable rates will depend on the changes on the mortgage company’s prime rate in the future.
Likewise, mortgage rates are affected by the duration of the loan. Shorter loans will mean a lower mortgage rate but higher monthly payments. 30-year mortgages usually have lower mortgage rates compared to 15-year mortgages. Lower mortgage rates allow buyers to save on their monthly payments, thus letting them direct those extra funds to other investments. On the other hand, higher mortgage rates in 15-year mortgages allow buyers to pay off their loan much quicker. This is because portions of their monthly payments on mortgage rates are used to pay off the principal loan amount.
The amount of your down payment can also affect the mortgage rate you receive. A higher down payment greater than 20% – will give the borrower the best possible mortgage rate. Conversely, a higher mortgage rate is applied to down payments of 5% or less.
It is generally better if the borrower pays the closing costs rather than allow the lender to pay this. It is usually the case that borrowers, who don’t want to pay all of the closing costs, get a higher mortgage rate applied to their loan.
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