What determines your interest rate?
While interest rates are still considered “historically low,” you might have noticed that they have been rising slowing over the past year.
So, what exactly causes interest rates to fluctuate? We spoke with Mario Gomez, Vice President of Capital Markets at TowneBank Mortgage, to find out.
“There’s a lot of factors that could cause rates to move,” Mario said. “Some of the main factors for long-term rate changes are inflation or the expectation of inflation, federal reserve policies, and changes in the stock-bond market, the housing market, and economic growth.”
While it might seem simple, predicting what direction rates will go is nearly impossible.
“Let’s put it this way, my crystal ball is cloudy,” Mario said. “It’s extremely difficult to predict the future of interest rates, because there are so many factors that drive rates up or down.”
Interest is the cost of borrowing funds from a lending institution, and each borrower will pay a different rate. The interest rate that borrowers are charged is based on market levels for interest rates, as well as several other factors that will vary for the individual borrower.
“It’s important to understand what impacts an interest rate,” Mario said. “Many people wonder why they aren’t getting the same rate as their neighbor, or their relative. It’s because no two borrowers are alike, and rates are very dependent on the borrower’s individual circumstances.”
According to Mario, here are a few factors that can impact your rate:
Credit: Your credit has a significant impact on the rate that you’ll pay, because it indicates how likely you are to pay back the loan. Borrowers with high credit scores can expect lower mortgage interest rates.
Down Payment: Generally, the more money you put down on a home, the more you have to lose if you stop making your mortgage payments. This means you’re a less risky borrower, which typically earns you a lower interest rate.
Loan Product: There are many different loan categories and products, such as Conventional, VA, FHA, and USDA loans. Rates can be different depending on which loan you choose.
Loan Term: You have the ability to choose the length of your loan term. Typically, they are in 15- and 30-year terms. In general, shorter terms will have lower rates because the money is paid back quicker. While you will experience lower rates and pay less interest with a 15-year term, your monthly payments will still be larger.
Interest Rate Type: Lenders allow you to choose between a fixed-rate mortgage or an adjustable-rate mortgage. If you choose a fixed rate, your interest rate will remain the same over the life of your loan, while an adjustable rate mortgage will be fixed for a few years, then will vary depending on market interest rates.
Borrowers who choose an adjustable rate mortgage can typically expect lower rates for the first few years of their mortgage, then their rate can fluctuate up or down depending on the market.
Location: Interest rates can vary depending on the market’s health in your city or state.
As you can see, there are many different loan options for borrowers to fit their individual needs.
So how do you find the product that’s right for you?
In today’s world, many borrowers start the mortgage process by shopping for interest rates online.
While it might seem natural to start your search online, Mario cautions borrowers to be skeptical of some of the information found on the internet.
“Borrower’s need to be aware that the rates they see online are very generic. With so many different factors affecting your rates, you really need to sit down with a loan officer and give them your information and your story in order for them to provide you with an accurate rate,” Mario said.
The same can be said when it comes to seeking mortgage information online, Mario said.
“While it’s smart to do your homework, it’s important to remember that the information that you find online is general and does not apply to you personally,” Mario said.
Seeking the advice of a local loan officer can give you important insight into your local market, and will give you peace of mind knowing that you have an advisor by your side throughout the entire mortgage process, Mario said.
“I know that buying a home is a personal process, but it’s also a huge financial investment,” he said. “You need to be able to speak with someone locally and ask as many questions as possible about the process and what to expect. This is likely one of the biggest purchases that you will make in your lifetime, and will help you to build equity and a nest egg for you and your family for years to come.”
Local mortgage professionals will also be able to provide you with contact information for trusted professionals in the area, such as Realtors, insurance agents, builders, etc.
As rates continue to slowly rise, Mario suggests that those seeking to buy a home shouldn’t wait too long.
“If you feel comfortable and are ready to become a homeowner, then there’s really no reason to wait,” he said. “Higher rates could limit your access to credit, limit your loan amount, or you could not qualify for the loan at all,” Mario said.
The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. This is not a commitment to lend.