If you’re buying a home and are faced with high mortgage rates, there are several factors that can decrease the rate you pay.
Changes to borrowing rates are brought on by many factors. One primary factor of mortgage rate fluctuation is inflation. The term “inflation” is used to describe a growing economy and the increase of prices of goods and services. When the economy grows, there is a higher demand for goods and services, and producers can increase their prices. The resulting price increase brings about higher real estate prices, higher rental fees 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.
Compared to interest rates, mortgage rates have a slightly different equation in their supply and demand. This difference explains why mortgage rates tend to move differently from other rates. For example, lenders may be committed to close additional mortgages. In doing so, they will have to decrease the mortgage rates even when interest rates are going up.
Additional Factors Affecting Mortgage Rates
Mortgage rates are influenced by several other factors besides inflation. Mortgage rates tend to increase when the amount of the loan increases. This expansion in mortgage rates is especially true if the loan amount exceeds the established loan limits of Fannie Mae and Freddie Mac. Loan limits typically change at the beginning with each year to conform with the trend mortgage rates have established.
The duration of the loan may also affect mortgage rates. Shorter loans usually equate to lower mortgage rates and longer loans can cost you higher mortgage rates. Loans with a 20-year or 15-year note can let you to save thousands of dollars on mortgage rate payments. However, this shorter time period also means that your mortgage rate payments every month will also be much higher.
It’s possible to avoid these high payments with an adjustable mortgage rate. This plan can allow you to start out with a lower mortgage rate, but your monthly mortgage payment will increase if the current interest rates go up. Fixed mortgage rates are typically higher than adjustable rates, but they provide the opportunity to save money as interest and mortgage rates increase.
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 can also affect mortgage rates. A lower mortgage rate generally means higher points paid on your loan. This same rule applies for lender fees such as closing costs. Higher closing costs paid to the lender will result in lower mortgage rates. If you choose not to pay for all the closing costs up front, the lender will increase your mortgage rate to accommodate the additional fees.
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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