Real Estate

What Affects Your Mortgage Rate

Story Published on November 26, 2008 ⋅  Email this Story ⋅  Print this Story ⋅ Post a comment ⋅

The only constant is change, especially when it comes to your mortgage rate.

One primary factor of mortgage rate movement is inflation. Inflation is a growing economy and increasing prices of goods and services. A growing economy means a higher demand for goods and services, allowing producers to increase their prices. This increase in prices therefore results in higher real-estate prices, higher apartment rents, and higher mortgage rates.

The Federal Reserve attempts to reduce inflation and slow down economy by decreasing interest rates. In the process, mortgage rates are lowered. Although mortgage rates have the propensity to fluctuate in the same direction as interest rates, their actual movements may also be based upon mortgage supply and demand.

Mortgage rates have a slightly different equation in their supply and demand when compared with interest rates. This slight difference is the reason why sometimes, mortgage rates move differently from other rates. For example, a lender has a commitment to make and is forced to close additional mortgages. To do so, they would have to decrease the mortgage rates even if interest rates are going up.

Other Factors Affecting Mortgage Rates

There are other factors, besides inflation, that influence mortgage rates. Naturally, your mortgage rate will increase as the amount of the loan increases. This expansion of mortgage rates is particularly true when the loan amount exceeds your established loan limit. The loan limit will usually change at the beginning of each year to conform to mortgage rate trends that have been established.

The duration of the loan can also affect mortgage rates. A shorter loan period will usually equate to a lower mortgage rate, and a longer loan can bring about higher rates. You can save thousands of dollars in mortgage payments on a loan with a fifteen or twenty year note. Of course, a shorter loan term will also mean you’re your monthly mortgage payment will be higher.

To avoid this high payment, an adjustable mortgage rate may help you begin with a lower mortgage rate, but if interest rates grow, your monthly mortgage payments will rise as well. Fixed mortgage rates are typically higher than adjustable mortgage rates but they can save you money also, especially if the interest and mortgage rates go up.

A higher down payment can help you to save on your monthly mortgage rate payments. By making a down payment of at least twenty percent, you can get the best possible mortgage rate. If your down payment is smaller you’ll have less equity in the property. Less equity means less collateral, so your mortgage rate will be higher.

Discount points are another thing that affects mortgage rates. Lower mortgage rates generally means higher points paid on your loan. The same rule applies for closing costs, which are fees that the lender must pay. Higher closing costs paid to them results in lower mortgage rates. However, if you do not want to pay for all the closing costs upfront, the lender will increase your mortgage rate in order to cover it.

The concept is quite simple. Lenders are generally willing to lower mortgage rates as long as more money is paid upfront. More money down results in lower mortgage rates. And less money down results in higher mortgage rates.

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