As you prepare to buy a new home, clearly you want the lowest rates possible when it comes to financing your mortgage. Rates are determined using a variety of factors, and there are many misconceptions when it comes to mortgage rates.
The Federal Government Doesn’t Set Mortgage Rates
While you may have heard that mortgage rates are set by the federal government, it is a myth that rates are on prime lending rates. Federal rates and mortgage rates are independent of each other, although both rates are focused on similar market conditions. It is common for federal rates to be low when mortgage rates are low, simply because both are responding to the same fiscal markets.
The Impact of Freddie Mac and Fannie Mae
As of August 1, 2021, Freddie Mac and Fannie Mae dropped the Adverse Market Refinance Fee for loans that they purchased on the secondary market. This was established during the pandemic to cover losses, dropping the fee to pass the savings on to buyers. This fee will drop interest rates and is something that is not in your control.
Factors Within Your Control
You have some control over the mortgage rate that you are offered when buying a new home. The higher your credit score is, the lower your mortgage rate will be. Look for opportunities to improve your credit score if you aren’t getting a mortgage rate that you are comfortable with. When you have enough time to prepare for a mortgage, work to lower any credit card balances you have. Make sure you pay all debt on time and take care of any delinquent debt you have on your credit history.
Your down payment plays a role in determining your mortgage rate. This is your loan-to-value ratio, and in general, you can secure a lower mortgage rate when your down payment is more substantial. While you can get a mortgage with a down payment as low as 3%, this will cause your interest rate to be higher than if you can put down a 20% down payment because your loan is considered less of a risk to the lender.
The type of mortgage you are trying to secure will also determine your mortgage rate. Cash-out refinances can come with a higher rate than a traditional mortgage.ARM mortgages, or adjustable-rate mortgages, change over time. While you might start with a low rate, your rate will go up and down based on the current rates. Riskier home types will increase your mortgage rate. Mobile homes, condominiums, investment properties, and second homes are seen as riskier than primary, traditionally-built homes. Mortgage rates are higher when you are purchasing a riskier property to protect the best interests of the lender.
Market Forces and Interest Rates
The financial markets play a role in current interest rates. Job growth, inflation, and the health of the overall economy are taken into consideration as mortgage rates are determined. When there is significant job growth, rates are lower because people are better able to afford the mortgages they secure. In a strong economy, rates are lower and consumers are purchasing homes that are more expensive. Look at your overall budget, and determine what you are comfortably able to afford each month when it comes to a mortgage payment. Stay within your budget to avoid getting in over your head. Each lender is different and will accept different levels of risk when it comes to writing a mortgage.
If you are looking to purchase a new home and want to see what your mortgage options are, contact Mid-America Mortgage at [Direct] to talk with our experienced lenders who can help you get the best possible rate for your new home.