Mortgage rates are a product of external and internal aka personal factors. The external factors being the Federal Reserve’s monetary policy including the benchmark rate, the Treasury yields, economic outlook/growth, inflation, housing market, and geopolitical events that stir the markets. From your end, your credit score and choices of a home and loan can influence where your rate is going or will you get a lower rate, essentially.
Presenting the factors that affect your ability to get a good rate. These are:
Your credit score is very important in determining your mortgage. It is the sum of what’s on your credit report. Generally speaking, an individual can have various credit scores including educational credit scores. Lenders will pull FICO scores that differ by the credit reporting agency – Experian, TransUnion and Equifax.
FICO scores are generally computed as follows:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
What’s important is for the lender to establish that you have a track record of paying your debts and that you can be relied on with your mortgage debt. If the lender sees that then you might score a lower rate.
Mortgage rates vary per state so where your property is located plays a part. It would also matter how much you are borrowing relative to the purchase price. If you are financing more than 80% of the purchase price, your interest rate will be higher compared with financing just 70%.
This is where the downpayment comes in. A bigger downpayment means a higher investment on the part of the borrower and lowers the chance of default on his/her loan. This translates to a lower risk for the lender and thus a lower interest rate on the loan.
The 30-year fixed mortgage rates are the highest compared to the 15-year and 5-year hybrid adjustable-rate mortgage per Freddie Mac’s Primary Mortgage Market Survey®. Longer-term mortgages tend to have higher rates because there’s a higher likelihood that the borrower will default on the loan given the long time period.
But the catch with shorter-term rates like adjustable-rate mortgages is that these rates adjust and are prone to fluctuations in the market.
Rates can also differ among the various mortgage products. There are numerous loan programs such as conventional, conforming, jumbo, and government loans such as FHA, USDA, and VA, and each type is priced differently.