What is behind the daily fluctuations of mortgage interest rates? When you are shopping for a mortgage it is important to understand the basic influences of mortgage rates and how they are determined. Mortgage rates are generally offered in eighths, so you’d see 4%, 4.125%, 4.25%, 4.375%, and so forth. There are two main components that determine your mortgage rate. The first is the market rate for mortgages, and the second is your individual financial situation.
Mortgage rates are closely tied to the yield on the 10-year Treasury bond. In general, people tend to refinance their mortgages, or sell their homes and buy new homes, in 10-year cycles. You can expect to see cycles of seven to 10 years for mortgages, so the 10-year Treasury bond is a pretty good measure if you want an idea of what’s happening.
If the yield goes up on 10-year Treasury bonds, then mortgage rates are likely to move higher. Likewise, if bond yields move lower, mortgage rates are likely to head lower as well. A good rule of thumb is to expect a 1.60% to 1.80% spread between the yield on 10-year Treasury bonds and mortgage rates.
This means that if the 10-year Treasury yield is at 2.4%, you can expect to see mortgage rates at right around 4.0% to 4.25%. The rate will never be completely predictable but you can get a general idea of which way mortgage rates are likely to head by looking at Treasury yields.
If bond yields increase mortgage rates increase, if bond yields decrease mortgage rates decrease.
Economic activity: One of the biggest factors in what happens with mortgage rates is economic activity. We get a lot of economic measures, from readings of the Consumer Price Index, to measures of Gross Domestic Product, to information about Consumer Confidence. All of these measures influence mortgage rates.
Basically, when the economy is in good shape, demand for mortgages increases, and interest rates move higher in response, since incentive to encourage people to buy homes isn’t needed as much. When the economy slows down, mortgage rates drop as lenders try to attract borrowers.
Mortgage rates are also shaped by such events as Federal Reserve Policy Announcements, the state of the housing market, and regional mortgage activity.
Your Personal Financial Picture
The ultimate influence on whether you pay the best available rate, or whether you are charged more, is your own financial situation.
Lenders take a look at your individual situation and use that to determine whether or not you will get the best possible rate, as determined by the market, or whether you will pay more. If you are seen as a bigger risk, you will pay a higher interest rate for your loan, since the lender is taking on a bigger risk that you will default on the loan. Here are some of the factors in your personal situation that impact your mortgage rate:
Your credit score: This is a three-digit summary of your financial reputation. Your credit score represents your ability to handle credit. If you have a higher score, the lender thinks it is likely that you will repay your loan, and is more willing to charge you a lower rate.
Loan term: The longer your loan term, the bigger the chance that you will default. If you choose a shorter loan term, and a faster payoff, you will be rewarded with a lower interest rate.
Down payment: You pay less when you have more of an equity interest in the property. The more you can put down for your down payment, the more you are likely to save in terms of interest. A 20% down payment will most likely result a lower mortgage rate.
Points paid: You can also pay points in an effort to reduce your mortgage rate. You can pay money up front, and see a reduction. A point represents 1% of your home’s purchase price. For each point you pay, you can expect to see a reduction of about 1/8 of your loan rate. So, if you are buying a home for $200,000, one point is $2,000. If your loan rate is quoted at 4%, you can get it down to 3.875% by paying that $2,000. Pay two points ($4,000) up front, and you could see it drop to 3.75%.
The determination of what interest rate an individual borrower will pay is subject to a number of factors, and it is always wise to speak to several lenders to shop for the best rate available.
Wallingford PA Real Estate – Wallingford, PA 19086
