How Mortgage Rates are Set and Its Impact on Your Finances

Many different things affect mortgage rates. Some have to do with external factors and the economy at large while others are based on your personal circumstances. Mortgage rates can impact your finances. So, before you obtain a mortgage, ensure you understand how rates are set and how you will be affected on a personal level.

How the Economy Affects Mortgage Rates

The overall level of mortgage rates is set by market forces, such as inflation, unemployment, and other economic indicators.

Based on such things, mortgage rates can move up or down on a daily basis.

Mortgage rates generally rise when the economic growth outlook is fast, there’s higher inflation, and a low unemployment rate. You can expect today’s mortgage rates to drop when those factors are the opposite.

Rising inflation usually creates higher interest rates because when prices go up, the dollar loses buying power, and mortgage lenders charge higher rates to compensate.

As for unemployment, when there’s a recession, it causes mortgage rates to fall.

Other economic indicators like stock prices, corporate earnings, and retail sales can also affect mortgage rates.

Also, while the Federal Reserve doesn’t actually set mortgage rates, it does raise and cut short-term interest rates in response to the economy’s broad movement.

How Your Personal Circumstances Affect Mortgage Rates

Your personal mortgage rate is dependent on how risky the lender judges your loan to be.

When a loan is seen as risky, you’ll have to pay a higher interest rate.

When assessing risk, mortgage lenders assess factors to see how likely you are to fall behind on payments and how much money the lender would lose if things go awry.

The two main personal factors that affect your mortgage rate are your credit score and your loan-to-value ratio.

If you have an excellent credit score, you’ll have more loan choices available and could obtain low interest rates.

That typically applies to people with credit scores of 740 or higher.

Interest rates will be higher, but still affordable, for people with credit ratings between 700 and 739.

If your credit score is between 620 and 699, your mortgage rate will be even higher.

The loan-to-value ratio measures the mortgage rate amount compared with the price of the home you are purchasing.

Basically, a larger down payment gives you a smaller ratio while a smaller down payment gives you a larger ratio.

So, if you put down $20,000 as a down payment on a $100,000 property, your mortgage would be $80,000.

That means you borrow 80% of your home’s value and your loan-to-value ratio would therefore be 80%.

If your ratio is above 80%, it will be considered high.

That means greater risk for the mortgage lender, resulting in a higher mortgage rate for you.

How Mortgage Rates Impact Your Finances

Now you know how mortgage rates are set, you should have a good idea of how the rates can impact your finances.

If you want to avoid paying out for additional private mortgage insurance, you will need to put down a 20% down payment, at least.

Also, both the mortgage rate and the price of your home will affect the cost of your monthly mortgage payments.

By understanding how economic factors and personal factors can influence your mortgage rate, you’ll be in a good position to determine which kind of property to purchase, when the best time to buy is, and how much your mortgage rate is likely to be.