What are the 3 Important Factors That Affect Your Mortgage Rates?

Applying for a mortgage loan can benefit you while buying a new house. It also allows deduction on your tax returns. As mortgage interest rates had hit the lowest in the U.S due to the global pandemic, homeowners took advantage of this. 

So, what caused this fluctuation?

Your lender usually fixes your mortgage rate, but it can fluctuate under certain circumstances. As the supply and demand chain affects the current interest rates, your mortgage rate changes too. Since the collateral you pay is your home in the case of a mortgage, it is better to understand the various factors that can affect it.

The Fluctuations in the Economy

As inflation increases the prices in the economy, this impacts your mortgage rates as well. For example, in October 2021, the interest rate for 30-year-old mortgages increased by 3.09%. So; far, this has been the highest since April 2021. 

Your mortgage interest rate will rise and fall according to inflation. How does that happen?

Inflation tends to mitigate the value of the dollar. Due to this fluctuation in the economy, lenders have to alter the interest rates on mortgages accordingly. Or else, the interest return will not produce any profit. 

Moreover, high consumer confidence and expenditure and positive growth in the GDP can cause the mortgage rates to increase. Even factors like a strong stock market can make an impact. 

What does it mean for the borrower?

A good economy means higher rates, and a bad economy causes a decrease in the rates. As the market is recovering now, this could very well change soon. But for now, the mortgage rates are still at an all-time low. 

Monetary Policies Issued by the Federal Reserve 

The Federal Reserve has the power to authorize monetary policies in the country. It's true that the specific mortgage rates are determined by your lenders and not by the Federal Reserve. However, as the bank's decisions and actions impact the economy, it can very well affect the interest rates on your mortgage. 

The Federal Reserve's decisions have an overall impact on all public interest rates. A Fed rate cut increases the money supply and decreases the mortgage payment rates, as witnessed during the pandemic lockdowns. With traveling restricted and the job market affected, the Federal Reserve tried to keep the economy in balance. 

However, they are likely to raise the rates to bring more sustainable growth with a growing market. 

Personal Finances

Mortgage rates are decided and fluctuate by the market's major economic forces and monetary policies, agreed. Your finances can, however, determine at which interest rate you can get the loan. 

This is where your credit score history becomes essential. Lenders would need to look at your record to evaluate the risks. Therefore, good credit history can get you lower interest rates. 

Other factors, like the loan-to-value (LTV) ratio and debt-to-income, also affect your mortgage interest rate. For example, having a lower LTV means you are less likely to default, and lenders prefer that. 

Similarly, the debt-to-income ratio denotes your cash flow. This is calculated based on your insurances, taxes, monthly bill payments, and other factors. Therefore, lenders prefer someone with a low ratio. 

Summing Up

With the current mortgage rates being at the lowest, many people are motivated to apply for mortgage loans. However, the mortgage interest rates might rise soon. As a borrower, it is better to wait till you can get a lower interest rate. Also, renting the property is an excellent way to save up enough to make a significant down payment.