When mortgage loans are issued, lenders decide how much interest they will charge on the amount they have loaned you based on a wide range of factors, including your credit score, income, as well as your home equity or down payment. The rate of interest on home equity loans and mortgages is called the mortgage rate. Mortgage rates fluctuate over time. The rate you secure has a significant impact on the amount of money you end up paying your lender.
There are many different types of mortgage rates to choose from. Fixed-rate mortgage rates are locked in for an agreed-upon term, whereas variable mortgage rates may fluctuate. Fixed-rate mortgages typically have higher interest rates; however, they are often preferred due to their stability over time.
5 Personal Factors That Determine Your Mortgage Rate
Various personal factors can affect the mortgage rates you may be offered. The five following mortgage rate factors have the biggest influence on the deals you will be offered:
1. Credit score rating
Your credit score will be checked by your lender to determine your past borrowing and payment habits. Not only does your credit score impact whether you may be approved for a mortgage loan or not, but it may also determine the mortgage rates you are offered. Higher credit scores help you secure lower mortgage rates, while a lower credit score will have the opposite effect.
2. The type of property you are buying
The mortgage rates offered by a lender will also likely depend on the value and condition of the home you intend to purchase. These factors are typically determined when either a home inspection, an appraisal, or both are conducted. If any major issues with the house are revealed, which decrease its value, it could impact the amount a lender is willing to loan you.
3. The size of your down payment
The size of your down payment could also considerably impact the mortgage rates you may be offered. Lenders prefer you to put anywhere from 5% to 25% down on the price of the home in order to be approved. Putting more money down on your house will usually give you access to lower mortgage rates since your increased equity in the house makes you less likely to default on the loan.
4. Loan term
Your loan term is the time you have to pay back the amount you have borrowed. The length of your loan term can affect your interest rates. In general, shorter mortgage terms have lower rates, while longer terms are often paired with higher rates.
5. Default risk
If a lender decides there is a high chance you will be unable to make your required payments on your debt obligation, you will be deemed a risky borrower. That could mean either your loan application is turned down, or you are offered higher than average mortgage rates.
To reach a conclusion about your default risk, lenders may look into your bank account history, your debt-to-income (DTI) ratio, and your credit score.
Reverse Mortgages & Interest Rates
Interest rates on reverse mortgages are influenced by several factors. These factors play a crucial role in determining the overall cost of the loan and the amount of money available to the borrower.
Some of the key factors that affect reverse mortgage interest rates include
1. Index rate: Reverse mortgages typically have adjustable interest rates that are tied to an index, such as the London Interbank Offered Rate (LIBOR) or the Constant Maturity Treasury (CMT). Changes in the index rate directly impact the interest rate on the reverse mortgage.
2. Lender's margin: The lender's margin is an additional percentage added to the index rate by the lending institution. This margin varies from lender to lender and is used to cover their costs and generate profit. A higher lender's margin will result in a higher interest rate for the borrower.
3. Loan program: There are two main types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), which are federally insured, and proprietary reverse mortgages, which are offered by private companies. The interest rates for these two types of loans may differ based on the lender and the specific loan program.
Market Factors That Affect Mortgage Rates
Various economic factors can also have a direct impact on mortgage rates being offered by most lenders at any given time. Significant economic growth often leads to increased mortgage rates.
On the other hand, lenders are typically pressured to provide lower rates when an economy is struggling. Increased inflation could also lead to an uprise in higher interest rates since the central bank uses interest rates as a way to keep inflation in check.
The Bank of Canada regulates the money supply and sets the prime interest rate, which lenders across the country use to set their own interest rates. If the Bank of Canada increases the money supply, interest rates tend to go down. If they decrease the federal money supply, interest rates will increase until the money supply increases once again.
Geopolitical factors can impact mortgage rates, too. Increased turmoil in various parts of the world usually influences people to make safer investments like bonds. The bond market could indirectly affect how much interest lenders charge for mortgage loans since the yields available from these debt securities are often tied to increases or decreases in mortgage rates.
In some extreme cases, the government can also step in, encouraging the central bank to lower interest rates when they have determined that the housing market needs to be stabilized.
How to Calculate Your Mortgage Rates
Would you like to get an idea of the mortgage rates you may be expected to pay?
There are numerous ways to calculate mortgage rates. Online mortgage calculators allow you to plug in information related to the house you intend to buy and the kind of mortgage you are looking for to determine how much you can expect to pay.
You can also calculate the total amount you will pay in interest by multiplying your monthly payment amount by the total number of monthly payments you are expected to make, and then subtracting the loan from the amount paid.
Of course, spreadsheet programs like Microsoft Excel can also help simplify this process. If you prefer to use manual calculations, there are certain formulas that can be used for these purposes. However, these formulas tend to be more complicated since they incorporate various factors, such as the way mortgage rates are compounded. They also require the use of several decimal points in order to be accurate.
Managing Your Mortgage Rate Expectations
Of course, there are many factors that contribute to the determination of mortgage rates. However, it can benefit you greatly to understand the details of such factors since even the smallest changes to mortgage rates can make a significant difference financially.
If you are familiar with the factors driving mortgage rates up or down, you can do whatever may be necessary to secure the best possible rates while purchasing your future home.
Since few purchases you will make in your life are as significant as that of a home, why not put in the work to make sure you can get the best possible deal on a mortgage? Doing so could mean saving hundreds or even thousands of dollars annually as you pay off your loan. It could also mean paying off your home faster and living debt free sooner than you may have imagined.
Jessica Coates is a blogger in Toronto. She graduated with honors from the University of British Columbia with a dual degree in Business Administration and Creative Writing. Jessica Coates is a community manager for small businesses across Canada. When not working, she leisurely studies economics, history, law and business solutions.