Don't look now, but the bull market rally in housing has gone on for six full years. Back in late 2010, existing-home sales were pacing below 3.5 million annually, which was down by about half from where they sat prior to the Great Recession. Since 2010, though, existing-home sales have climbed at a pretty steady pace, reaching 5.47 million homes annually as of October.
While it's probably a stretch to call the U.S. housing market "hot," it's a pretty fair statement to suggest it's healthy. It's so healthy, in fact, that the National Association of Realtors' annual "Profile of Home Buyers and Sellers" survey showed that the share of first-time home buyers ticked up to 35% in 2016, which was the highest level since 2013, where it was 38%. Since lending rates have stuck near historic lows, the opportunity to buy a house with an attractively low mortgage rate is acting as a dangling carrot for buyers that may be on the fence.
What influences your mortgage rate
But, if you're planning to buy a home, or even refinance an existing mortgage, you need to be aware of the numerous factors that can influence your mortgage interest rate. Here are eight such factors.
1. Your credit score
Perhaps the best-known mortgage rate influencer is your credit score (also known as FICO score). FICO scores take five factors into consideration (with accompanying importance to your FICO score in parenthesis):
- Your payment history (35%).
- How you utilize your credit (30%).
- The length of your credit history (15%).
- New credit accounts (10%).
- Your credit account mix (10%).
Though this may not be a precise formula, the gist is simple: Lenders want to feel comfortable about your ability to pay back what will likely be the largest loan of your life. If you make your payments on-time, use less than 20% to 30% of your available credit, keep good-standing accounts open for long periods of time, avoid opening too many new accounts, and demonstrate that you can handle both installment loans (e.g., auto or student loans) and revolving credit (e.g., department store credit cards), chances are you'll have a respectively high credit score.
Lenders are looking to offer mortgages to consumers with high credit scores, and they may be willing to lower your mortgage rate to gain your business if it's high enough. Conversely, if you have a middling or low FICO score, your mortgage rate could be adversely affected. Or worse yet, you may not qualify for a mortgage loan at all.
2. The total loan amount
The total amount of your mortgage loan – and thus to some degree the price of the house you're considering -- can influence your mortgage rate as well. If you take a relatively small loan, say under $100,000, your lender will likely charge you more in order to ensure that it makes a decent profit on such a relatively "small" loan.
Likewise, if you take out a large loan, your lender is liable to charge you more since it's taking on a bigger risk by giving you such a large loan. The jumbo loan limit, as these large loans are referred to, is $417,000 throughout much of the United States. Therefore, if your mortgage loan is under $100,000 or over $417,000, you'll probably pay more than if it was within the sweet spot between these two figures.
3. Your expected down payment
The amount you're willing to put down on a new home can certainly impact what sort of mortgage interest rate you'll pay. Everything comes down to risk, and the less risk your lender has, the more willing they'll be to compromise on your lending rate. As a general rule, if you're willing to put a 20% down payment on a home, you'll usually qualify for a lower mortgage rate.
Understandably, the mortgage rate you'll pay can also vary greatly between lenders, so I'd strongly encourage you to shop around between banks and credit unions in your area, because you may only need to put 5% or 10% down to positively influence your mortgage interest rate.
4. Loan term
The term of your mortgage also influences how much you'll pay. Most lenders incentivize promptness, meaning the shorter your loan term, the lower your mortgage rate will be. A lower mortgage rate is preferable since it means you'd pay less in interest over the life of the loan.
According to Bankrate, as of Nov. 15 the 30-year fixed mortgage rate was 3.88% compared to just 3.07% for the 15-year fixed mortgage. For a $200,000 loan, this 81 basis-point difference translates into a life-of-loan savings of $88,954. Yes, your monthly payment will be almost $450 higher with a 15-year fixed loan, but you'd also save a considerable amount of money.
5. Fixed vs. adjustable
The type of interest rate you choose can also impact your mortgage rate. There are two main types of interest rates: fixed and adjustable. With a fixed rate you know exactly what you're getting. Fixed rates aren't going to move over the life of your loan.
On the other hand, adjustable rate mortgages typically offer a below market rate for a period of three, five, or seven years, then they adjust higher based on LIBOR (the London InterBank Offered Rate). In easier-to-understand terms, if interest rates rise notably during your adjustable teaser rate period, you could face sticker shock once you're exposed to a variable mortgage rate.
6. Loan type
There are also a couple different types of loans you may qualify for that can positively impact your mortgage rate.
What we've discussed above (30-year and 15-year) are conventional mortgage loans where 20% is typically required to be put down by the homebuyer. However, FHA loans (which derive their name from the Federal Housing Administration) often require down payments of as little as 3.5%, and they can offer more attractive interest rates than conventional loans. On the other hand, FHA loans may also require the homeowner to purchase private mortgage insurance, which protects the lender against default should the buyer not make their payment. Different loan types can yield vastly different mortgage rate results.
7. Location of your home
It's one of those overlooked factors of the mortgage hunting process, but the location of your home can influence your mortgage rate. Part of this could have to do with the health of the housing market within your state or county. If the housing market is healthy where you're looking, then a lender is less likely to charge a higher rate because it's less worried about the risk of default.
Another component depends on home prices within the area you're looking. Remember, small loans or jumbo loans typically mean a higher mortgage interest rate. This means if you're looking to live near water (i.e., higher-priced areas) or deep in rural America (less expensive homes), the eventual size of your mortgage could fall into that zone where banks are encouraged to charge a higher rate.
8. Monetary policy
Finally, the Federal Reserve's monetary policy can also indirectly influence mortgage rates. The Federal Reserve itself doesn't set mortgage rates. It does, however, control the money supply in America. Increasing the money supply generally pushes the federal funds rate lower, and thus interest rates move lower. Mortgage rates have a tendency to closely follow the 10-year Treasury yield. Tightening the money supply has a tendency to move interest rates higher, and thus mortgage rates higher.
In recent Federal Open Market Committee meetings, the regulatory body has strongly hinted at tightening monetary policy, which would signal that mortgage rates could head higher very soon.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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