What Affects Mortgage Interest Rates? A Guide for Homebuyers
If you're looking to buy a home and you're curious about what affects mortgage interest rates, you're not alone. A mortgage interest rate is an important factor in the overall cost of a home. When you're in the market to buy, it's important to understand all the different factors that affect mortgage interest rates, what falling rates mean for your homebuying power, and how lower mortgage interest rates can help you get more home for your money.
What Affects Mortgage Interest Rates
Here are the factors, both macro and micro, that determine your mortgage interest rate:
- Federal Funds Rate: The Federal Reserve raises and lowers interest rates in response to economic conditions, such as trade, inflation, and Gross Domestic Product (GDP) figures. When the economy is thriving, the Fed typically raises interest rates to encourage people to save. When the economy is shrinking, it usually lowers interest rates to encourage people to spend money and to stimulate the economy. The federal funds rate has a direct impact on all types of fixed-income investment products, like bonds, Treasury notes, and fixed mortgages.
- Credit Score: Your credit score has such a significant impact on your mortgage interest rate; the better your score, the lower the interest rate you'll typically pay.
- Location: Mortgage interest rates vary depending on the state and city your house is in. They're often based on housing supply and the location's desirability. Lower supply may drive up interest rates and higher supply might drive them down.
- Down Payment: A higher down payment can lower your mortgage interest rate. If you put down more money on your home purchase, lenders will see you as having more skin in the game and thus being a lower lending risk.
- Interest Rate Type: You can either take out a fixed-rate or an adjustable-rate mortgage. While your interest rate on an adjustable-rate mortgage could initially be lower, it might increase over time if the Fed raises interest rates. On the other hand, if you take out a fixed-rate mortgage, you'll maintain the same interest rate for the entire term of the loan — unless you refinance.
- Loan Term: The shorter your loan term, the lower your interest rate will typically be. For example, a 15-year fixed-rate mortgage will typically have a lower interest rate than the more common 30-year fixed-rate mortgage.
- Mortgage Type: There are a wide variety of mortgage loans available, from conventional and FHA to VA and USDA. The type of loan you choose will affect your mortgage interest rate.
How to Leverage Your Relationship With Your Bank for a Lower Mortgage Interest Rate
Did you know you don't have to wait for interest rates to go down in order to access a lower mortgage interest rate? Instead, you can leverage your relationship with your bank. Banks often offer existing customers a discounted mortgage interest rate. These relationships can be a powerful way to increase your purchasing power and save money in the long run. For example, for a $250,000 home purchased with a 30-year fixed-rate mortgage, a .25 percent client discount on interest rate could save more than $12,000 over the life of the loan.*
It turns out that what affects mortgage interest rates is a multilayered equation, but you're now armed with information to help you figure out how to get the best rate possible.