What Factors Influence Mortgage Rates?

That’s when many of us turn to the news to gain a better understanding of what causes mortgage rates to rise and fall. But these fluctuations only tell us so much about why these tiny fractions have such a huge effect on whether or not you can afford the home of your dreams.

In this article, we’ll explain the various factors that determine mortgage rates. Some of these factors are economic forces over which you have little to no influence. Other factors, however, are well within your ability to control.

With that in mind, we’ll also provide sound financial advice on how you can secure the best possible mortgage rate, whether you’re purchasing a new home or refinancing your existing home loan.

Mortgage Rate Factors You Can Control

When judging risk, mortgage lenders consider how likely you are to fall behind on your payments — or stop making payments altogether — and how much money they might lose if you default on your loan. Among the many factors they consider, two are very much subject to your control: your credit score and the loan-to-value (LTV) ratio of your mortgage.

1) Credit score. The lowest mortgage rates go to borrowers with a credit score of 740 or higher. These borrowers typically also have the broadest choice of loan products.

As a general rule, as credit scores fall, rates rise, and borrowing options narrow. If you have a credit score below 620, lenders may view you as a high-risk borrower, meaning you may find it challenging to secure a favorable mortgage rate.

Some mortgages, such as Federal Housing Authority (FHA) loans, have lower minimum credit score requirements. Nevertheless, if you can build your credit first, do so. Having a higher credit score will help you procure a mortgage at a better interest rate, potentially saving you thousands of dollars over the life of the loan.

2) Loan-to-value (LTV) ratio. This figure measures the principal of your mortgage amount relative to the price (or value) of the home you are purchasing (or refinancing). For example, if you buy a house for $100,000 and make a down payment of $30,000, your mortgage will be $70,000. So, you’re borrowing 70% of the home’s price, and your LTV ratio is 70%. Therefore, a larger down payment reduces the LTV ratio, while a smaller down payment increases it.

Lenders tend to view any LTV ratio higher than 80% as risky. That perceived risk translates into higher mortgage rates for those borrowers, especially if they also do not have excellent credit (a score of 740 or higher). A mortgage with a high LTV ratio may also come with a mortgage insurance requirement.

Other factors. Lenders may charge you more for cash-out refinances and adjustable-rate mortgages, as well as loans on manufactured homes, condominiums, and second or vacation homes, as these are considered riskier loans. Although most homeowners will do everything within reason to meet mortgage payments on their primary residence, the same cannot necessarily be said for their investment properties.

Mortgage Rate Factors That Are Beyond Your Control

What about those economic forces and market trends that influence mortgage rates? We discuss the most significant of these factors below.

1) Inflation. The gradual upward movement of prices due to supply and demand is a leading indicator of a nation’s overall economic health. It is also a critical factor for mortgage lenders.

Inflation erodes the purchasing power of your dollars. That means lenders must maintain interest rates at a level sufficient to overcome that erosion and protect their investments. Consequently, mortgage lenders carefully monitor the inflation rate and adjust interest rates accordingly.

2) Rate of economic growth: Economic growth indicators, such as the gross domestic product (GDP) and employment, influence mortgage rates. Economic growth usually brings higher wages and additional consumer spending — including consumers applying for mortgages.

Generally speaking, this growth is good for the nation’s economy. However, rising demand for mortgages tends to move mortgage rates upward, as lenders have only so much capital to invest.

Conversely, when the economy slows, employment and spending decline. That decline is often accompanied by a drop in demand for home loans, which, in turn, puts downward pressure on mortgage rates.

3) Federal Reserve policies. The Federal Reserve, the nation’s central bank, does not dictate the mortgage market’s interest rates. However, its actions in setting the Federal Funds rate — the interest rate at which commercial banks borrow and lend their excess reserves to each other — and adjusting the money supply have a significant impact on mortgage rates.

For example, increases in the money supply put downward pressure on rates, and tightening the money supply can edge rates upward.

4) The bond market. Banks and investment firms bundle mortgages and sell them as investment products known as mortgage-backed securities (MBSs). The yield on these securities must be high enough to attract potential investors.

Complicating the equation, government and corporate bonds offer competing long-term, fixed-income investments. The money investors can earn from these competing investment products affects the yields that MBSs must offer. Lenders have to generate sufficient yields for MBSs to make them competitive in the bond market, and that can translate into higher mortgage rates.

One government-backed bond that has a particular influence on the determination of mortgage rates is the federal government’s 10-year Treasury bond. Typically, firms selling MBSs must offer higher yields, partly because the Treasury bonds are backed by the full faith and credit of the U.S. government — a guarantee MBSs cannot provide. And, as similar investment products, they’re often competing for the same investors.

Other economic indicators. Beyond these four factors, retail sales, housing starts, corporate earnings, stock prices, and the local demand for houses — which recently hit an all-time high in North Texas — can affect mortgage rates, either independently or in conjunction with one another.

Successfully Applying For A Mortgage

Now that you understand the many variables at play, take these steps to make sure you qualify for the best mortgage with the most favorable terms.

• Check your credit score (the higher, the better) and make sure your credit reports are free from errors.
• Have enough saved to make a down payment that will result in an LTV ratio below 80%.
• Don’t start seriously shopping for a home until you know the type of mortgage that makes the most sense for you: a 30-year fixed-rate, 15-year fixed-rate, or an adjustable-rate mortgage.
• Research and compare rates from several mortgage lenders. Narrow your choices by reading online reviews and asking for lender references from friends, family, and real estate agents.
• Submit your loan application and get pre-approved to borrow at a given loan amount. Having a loan approval letter is a great advantage. It shows sellers you’re a serious buyer and that the loan is likely to close.

Find Your New Home With The Help Of Guaranty Bank & Trust’s Mortgage Experts

If you’re ready to put down roots in Texas, trust one of the oldest and most respected community banks in the Lone Star State to help you find the right home loan — the one featuring the friendliest terms, the most manageable costs, and the best rates.

Get in touch with any of our caring and collaborative mortgage specialists by starting your loan application today or booking a video appointment. We look forward to showing your our commitment to exceptional customer service!