After reaching record lows near the end of July, mortgage rates have moved steadily higher this month, and the trend accelerated this week. While the US economic data was roughly neutral and there was little news out of Europe, mortgage rates continued to rise.
Prior to July 26, two primary factors were responsible for the decline to record low mortgage rates. First, the European debt troubles caused investors to shift to relatively safer assets, including US mortgage-backed securities (MBS), and mortgage rates are largely determined by MBS prices. Second, slower economic growth reduced inflationary pressures and supported low mortgage rates. While the troubles in Europe and sluggish growth rates are likely to remain for quite a while, what changed is that investor expectations on both fronts have improved this month.
On July 26, the President of the European Central Bank (ECB) declared that the ECB will do "whatever it takes" to preserve the European Union (EU), and Germany's Chancellor made similar comments this week. This raised expectations that the ECB will provide additional aid and help prevent the debt troubles from spreading. As a result, investors have partially reversed the flight to safety trade, lifting stocks and hurting mortgage rates.
The stronger than expected July Employment report released on August 3, this week's Retail Sales report, and improving housing sector data have raised the outlook for US economic growth. In typical fashion, as expectations have improved, mortgage rates have moved higher.
* Conforming loan amount is $417,000 or lower with origination of 1 or 2 pts. depending on credit score, occupancy, rate and term or cash out and Loan to Value.
We can also do no point loans or no cost loans, as with everything else there is a trade off. The rate is dependent on whether you are willing to pay points. The higher the rate, the lower the cost and vice-versa.
When the time comes to buy a home, you should hope for a buyer's market, ample assets in the bank for a down payment, a great home to buy, and an environment of low mortgage interest rates. Low prevailing rates don't necessarily mean that you'll get offered low ones, though. Here are some reasons why you might get offered disappointing mortgage interest rates.
Shop around, and you'll find yourself offered a variety of mortgage interest rates, as different lenders use different (or differently weighted) criteria and algorithms when making their calculations and decisions. When you shop around, try a range of lenders, such as one or more Mortgage Brokers, national banks, regional banks, credit unions, and community banks. Mortgage Brokers, for example, often offer lower rates than big national banks.
The lock-in period
It's common to lock in a mortgage rate with a lender, but the longer the lock-in period you choose, the higher the mortgage rate you may be offered, as this exposes the bank to more risk. Alternatively, you may have to pay in points -- i.e., prepaid interest -- for a longer lock-in.
The type of mortgage
Mortgage interest rates differ by the kind of mortgage you buy. A 30-year fixed-rate mortgage will have a higher rate than a 15-year mortgage. A fixed-rate mortgage will often have a higher rate than an adjustable-rate mortgage (ARM). (ARMs usually charge a low rate for the first few years before adjusting the rate upward or downward.) Meanwhile, a "jumbo" loan, which is one that exceeds the limit for a "conforming" loan (recently $417,000 in most spots in America), can also carry mortgage higher interest rates. Then there are FHA loans, which are insured by the Federal Housing Authority. They remove much risk from the lender, so lenders will often charge lower mortgage interest rates for them and may have easier qualification standards as well. Refinancing deals also sometimes carry higher rates.
Your down payment
How much home buyers put down affects the mortgage interest rates they get. Lenders will typically offer better rates to those who have a loan-to-value ratio of 75 or less, meaning that they made a down payment of 25% or more of the home's value.
If you're getting offered higher mortgage interest rates than you want, you can probably lower them by offering to pay one or more "points." A point is 1% of the value of the loan, so with a $150,000 loan, you'd pay $1,500 per point, and your lender would offer a lower rate. Only do so if you're planning to stay in the home a while, as the lower monthly payment might not make up for the upfront cost. (By the way, be sure to factor fees into your comparisons of mortgage interest rates. One lender might offer a slightly higher rate but could charge you far less in closing costs and fees.)
The property type
Mortgage interest rates also vary according to property type. If you're buying a condominium, for example, you'll often be offered higher mortgage interest rates than if you were buying a single-family home. (In recent years, defaults were higher for condos than for single-family homes, leading lenders to be more cautious about them today.) Multifamily buildings or investment properties also typically face higher rates.
Your debt, income, and credit score
Mortgage interest rates are also influenced by you -- your debt level, income, and credit score. The credit score has a lot to do with it. Lenders look at your debt-to-income ratio, and the lower the better. They take into account your financial obligations, such as car loans, student loans, credit card debt, alimony, and child support. And they assess the strength and reliability of your income, too. Someone with a sizable salary who's been at the same job for many years will likely get offered better mortgage interest rates than someone earning less through a freelancing job. Factors that affect your credit score include unpaid bills, late bills, and using much of your available credit limit. You can increase your credit score by fixing errors on it, paying down debt, and increasing your credit limit, among other strategies.
The general riskiness of the loan
If you choose not to establish an escrow account to pay for the home's taxes and insurance and opt to pay for those yourself, the mortgage interest rates you're offered could be a little higher, as there's a somewhat higher risk of problems.
So when you shop around for a mortgage and find that you're being offered poor mortgage interest rates, it might be because you're paying only 15% down on the home, you have a low credit score, and you're buying a rental property -- or one or more of a range of factors. Fortunately, many factors are within your control, at least to some extent, so you may be able to take some steps to lower your rate.