Understanding how mortgage rates work can be tricky for a lot of people because of their credit rating and the banks that they work with. Mortgage rates fluctuate often and right now they are at an all-time low, making it a great time to buy if you are in a good financial position. Getting locked into the right mortgage rate can save you thousands of dollars on the life or your loan and can make meeting your monthly expenses easier.
How are mortgage rates set?
Let’s start with a basic overview of who is in charge of the mortgage rate. While you may think your local bank may have some control, they really don’t. Your local lender can set their own “risk factors” as far as who they would like to approve for a loan but the actual mortgage rates are set by the government. Freddie Mac and Fannie Mae are owned by the government and are the largest mortgage investors, helping to set the rate when they sell their loans to Wall Street to be traded. The financial investors (people investing in Treasury securities and bonds, etc.) actually have the power over the interest rate. This is why the rates will climb or will tumble substantially as they are dependent upon the secondary market to set the rate.
Choosing your mortgage
Working with your lender you can check out the various types of mortgages that are available. Here are the mortgages you can choose from:
- Fixed rate mortgage
- Adjustable rate mortgage
- Subprime mortgage
Typically a fixed rate mortgage is the standard as it allows you to lock into a loan with a set rate. When the interest rates are low, it is a great time to lock into the lower rate. Fixed rate mortgages do allow you to refinance your loan in the future so you can get the best rates. Based on your financial situation you may opt for a 15 year loan to own your home sooner or you may need to opt for a 30 year loan as it allows for a lower monthly payment amount. Compare the amount of money you will pay toward interest with the various loans to get the best payment and interest rate available.
Qualifying for low rates
In order to qualify for low rates on your mortgage, there are some criteria that you need to meet. Here are some of the ways in which you can qualify for lower rates:
- Improve your credit rating. Your credit score will have a big impact on your ability to get a loan. In the past anyone with a credit score of 620 would be able to qualify for a loan. Now banks have tightened their lending restrictions and want to see credit ratings around 720 or higher to qualify for lower rates. Having a score that is high in the 700’s will be the best option to get the lowest rates available. Order a copy of your credit report and check it over for errors and other things to see what you can improve to increase your score before you apply for a loan.
- Reduce your debt. Lenders want to see borrowers that do not have a lot of debt. Reduce your debt burden as it shows lenders that you are able to control your spending. High amounts of credit card debt can seriously hurt your ability to acquire low mortgage rates. Keep your credit card balances below 30% of the credit limit available in order to demonstrate strong financial control to lenders.
- Maintain a steady job. Lenders look for security when they are considering you for a mortgage. You need to stay with your current employer when you are going through the loan process as it does help to show lenders that you have a strong work history and consistent income.
- Research rates. To find the best mortgage rates you need to shop around and compare rates with different lenders. Some will qualify you for lower rates if you will put money down on the home where others can still give you a low rate because of your credit rating and debt to income ratio. Use a mortgage calculator in order to estimate your costs and also to help you see how much money you need to come up with for the down payment amount.
Check on your financial situation before you go out and start shopping for home. There are numerous things that you need to consider before you buy a home and to make sure that you are not going to become house poor. A good lender along with a skilled real estate agent can help you to find the best rates but they will also help you to understand how much you can actually afford to spend on the loan.