Shop the Lender, Not the Rate
If you want the best mortgage interest rate, find a lending professional who is actively watching the market and knows when to lock you in at the lowest rate.
You will get different answers on interest rate quotes depending on what time of day and who you are asking because rates are constantly in motion due to a number of outside forces.
To feel confident that you are working with the right lender who can provide you with the lowest rate for your unique lending scenario, ask a few of the questions on this page and see if their answers add up.
How Are Mortgage Rates Determined?
Mortgage rates are determined by the general economic climate and the risk your mortgage loan presents to a lender.
The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors. Fannie Mae and Freddie Mac are two of the biggest secondary mortgage investors in the world.
When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans. That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.
Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments. This perception of safety is due to the implied government backing of Fannie Mae, Freddie Mac, and FHA.
The media often implies mortgage rates are based off the 10-year US Treasury Note, which is not exactly accurate. While the 10-year Treasury Note has been known to trend in the same direction as Mortgage Bonds, it is not unusual to see them move independently.
What Factors Influence Mortgage Backed Securities?
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Since a mortgage is a long-term - usually 30 year - deal, inflation can dramatically eat into the profits of a mortgage lender. Thus the sensitivity of mortgage rates to inflationary factors.
As inflation increases, or as the expectation of future inflation increases, rates will push higher. The contrary is also true; when inflation declines, mortgage rates decrease.
2) The Federal Reserve
The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds
Decreasing unemployment will suggest that mortgage rates will rise. Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. In fact, the Fed is currently using employment data as a benchmark for when to raise rates.
GDP, or Gross Domestic Product, is a measure of the economic output of the country. High levels of GDP growth may signal increasing mortgage rates.
5) Global Events
Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage relates. Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower.
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Common Mortgage Rate Questions
Conventional financing has loan-level price adjustments (LLPA) for credit score, loan-to-value, and a number of other factors concerning a home loan. FHA, VA, USDA, and other federally insured loan programs are more forgiving with credit scores and rate adjustments.
It is a common misconception that when the Federal Reserve implements a rate cut, it is immediately correlated to a reduction in mortgage rates.
The Federal Reserve policy influences short term rates known as the Fed Funds Rate (FFR). Lowering the FFR helps to stimulate the economy and increasing the FFR helps to slow the economy down. Effectively, cutting interest rates (FFR specifically) will cause the stock market to rally, driving money out of bonds and creating potential for inflation.
Mortgage Bond holders need to obtain a higher rate of return on their money if inflation is increasing, thus driving up mortgage rates. With the Federal Reserve Board meeting every six weeks, this is an important question to ask. If your lender does not have a firm understanding of this relationship, they may leave your rate unprotected costing you thousands of dollars over the life of your mortgage.
That depends on the loan program and your unique lending scenario. You may have to in some cases, but the best way to find out where you stand is to speak with James K Barath, CMPS and review your credit. If you are eligible for a mortgage program now and wait six months to improve your credit standing for a better rate, it is possible that rates could still go up and price you out of the market.
Paying "points" up front when you go to settlement with your mortgage will lower your interest rate but there are factors to consider. Each point will cost you 1% of your original loan amount at settlement. To determine whether it makes sense to pay discount “points”, you need to compare the cost of the discount points to the monthly savings created by lowering the interest rate. Simply divide the total cost of the discount points by the savings in each monthly payment. This calculation provides the number of payments you'll have to make before you actually begin to save money by choosing to pay discount “points”. If the number of months it will take to regain the discount points is longer than you plan on holding this mortgage, you should consider an interest rate product that doesn't require discount points.
Higher loan-to-values present more risk to a mortgage lender, which may result in a higher rate. It also depends on your loan program, property type, and a handful of other compensating factors.
You would discuss this with your LeaderOne Loan Officer who will advise you of the rates available for your loan product. You then “lock” the rate and discount points with your loan officer.
Not as long as you complete the mortgage process in the designated lock commitment time frame. Usually, a lock commitment is good for 30, 45, or 60 days.
When deciding on the type of rate you want, it's all a matter of time. You'll want to think about a fixed rate mortgage if you plan to be in your home for more than seven years. Fixed rates provide you with set payments and protection against increasing mortgage interest rates. An adjustable rate mortgage would be more suitable for you if you foresee living in your home for less than seven years. With an adjustable rate mortgage, you open yourself up to the possibility of having your monthly payments increase each time your interest rate changes.
One point is equal to one percent of the loan amount. Points are used to buy down the interest rate. Origination fees help pay the cost for the lender to do the loan.