Many factors are considered when applying for a mortgage loan with the priority being the monthly payment amount. Several aspects contribute to this figure.
Interest rates can play a significant role in determining not just the payment but also the price you’ll pay over the life of the loan.
Have you ever wondered what affects the rates that banks charge? If so, you’re not alone.
Interest rates are determined on two levels. For the sake of this article, we’ll call them internal and external factors. These different items influence most banks and financial institutions everywhere.
External Factors Affecting Interest Rates
- Supply and Demand – Mortgage rates, like most consumer products, are affected by supply and demand. When the economy is good, and people are buying homes, lenders charge higher prices. When the economy is slow, and homes aren’t selling, banks lower the rates to reel in customers.
- The Fed – The Federal Reserve Board affects interest rates as a method of controlling economic growth. If the Fed is trying to curb inflation, they raise the prime rate, which slows down the economy and results in higher prices. When the Fed wants to motivate the economy, they lower their standards, which leads to banks charging lower amounts.
- Bonds – Government-issued bonds can affect mortgage rates as well. Mortgage securities and bonds are in competition for similar investors, so how well the bonds do can change how much interest lenders want to charge customers.
Internal Factors Affecting Interest Rates
Banks lend money to make more money, and they make their money using the interest they collect. There are internal aspects that, while they affect rates, apply only to you.
- Credit Worthiness – Good credit scores and a regular income are probably what matters most when applying for a loan. Generally, the higher your credit scores, the lower the interest rates you’ll be offered.
- Loan Type – Rates can be affected by if whether the mortgage is a fixed-rate or an adjustable-rate mortgage.
- Price of Home – Mortgage loans for small or large amounts may come with slightly higher rates.
- Location – Rates may vary from state to state.
- Loan Term – Loans for shorter terms generally have lower rates.
- Down Payment – The more extensive the down payment, the lower the interest rates are going to be.
How Interest Rates Work
Many homeowners don’t realize that the interest makes up a large part of their monthly mortgage payment. Say a couple borrows $100,000 on a ten-year mortgage. When anticipating their payment amount, they often assume $100,000/120 months = $833. If they weren’t charged interest, that payment amount would be correct. The bank is charging 3% interest, and it’s charged on a monthly basis.
When you take 3% or .03 and divide it by 12, you get .0025. When you multiply $100,000 by that, you get $250, which is the amount of the interest payment. Add the $250 to the $833, and you have an approximate amount for the monthly loan payment. Taxes, insurance, and PMI if needed, are added to that amount.
Although some circumstances affecting overall interest rates are beyond your control, many aspects can be controlled by the borrower. If you have good credit, steady employment and are financially responsible, you’ve won half the battle. Taking advantage of the opportunity to obtain a free credit report can be beneficial.
Doing your research on current financial trends can also keep you aware of the housing market trends. If you’re looking for a mortgage loan give our office a call – our team will be happy to help you.