A mix of factors contributes to the mortgage rate a lender quotes a borrower. It’s not a precise science, so it’s normal for mortgage rates to vary from one lender to the next, even with the same loan application.
Mortgage rates have a base rate heavily determined by the Federal Funds Rate, a Federal Reserve rate.
The Federal Funds Rate influences the interest rate, and the interest rate instructs the dynamics of lending among lending institutions to a large extent.
The Bond Market also plays a pivotal role that considerably influences Mortgage Rates.
You must understand that as influential as the Federal Reserve is on matters of interest rates, its influence is not as far-reaching as some people believe.
This is because the Federal Reserve can only meaningfully manipulate the interest rate in the short term.
As a result of this reality, mortgage rates are more susceptible to the whims of investors in the bond market.
For instance, if the prevailing sentiment in the bond market at a point is that the Federal Reserve might be unable to forestall inflationary pressures in the market, investors might make moves that could result in higher rates.
This is not to say the investors act in concert to cause a greater change in the mortgage rate. Investors tend to favour the conservative approach when there’s a thick cloud of uncertainty. This conservative approach is bound to have a ripple effect on the overall economy, especially the longer-term loans.
Meanwhile, while it’s not prudent to exaggerate the Feds capability to influence the interest rate; it’s crucial to note that the Feds is not a lame duck. If the Feds purchase more mortgage-backed securities and treasuries, the increase in rate for longer-term loans can be contained.
Investors will likely interpret such acquisition as an assurance of some sort, and they won’t invest in panic.
A low-interest rate can mean a model homeowner will get a mortgage with a favorable monthly payment regime compared to when the interest rate is high.
Bear in mind that there are other factors capable of causing a change in the mortgage rate. Such factors include the health of the local and national economy, consumer confidence etc.
Low-interest rates can make homeownership more affordable, but a larger supply of houses can also dampen housing prices in the market.
How does your mortgage option affect you when the rates change?
Ultimately, irrespective of the mortgage type you opted for, don’t attempt to time your housing purchase based on what is happening or what you suspect might happen to the interest rate in the future.
If you opted for an adjustable-rate mortgage, there might be an opportunity to benefit from a drop in the interest rate, and if the converse is true, you’ll have to live up to the terms of your loan.
If you can’t stomach such uncertainty, a fixed-rate mortgage might just be the best for you.
Fluctuations in the overall interest rate are beyond your control and even your lender’s. Still, there are a few hacks to get a competitive mortgage rate from a lender.
Hacks for a competitive Mortgage Market
As a prospective home buyer, you can do a few things to get a favorable mortgage rate from a lender.
It all starts with your credit score. Suppose a lender examines your financial records and concludes that you’ve got financial fidelity. In that case, he’s more likely to quote you a competitive low mortgage rate. If the reverse is the case, the prudent thing to do as a lender is to hedge the risk. This will probably result in a higher mortgage.
Another hack you can deploy to get a favorable mortgage rate is a large down payment. A large down payment improves your credit score and communicates a commitment to the lender.