As any potential homebuyer knows all too well, mortgage rates have remained stubbornly high for quite some time now. The Federal Reserve is partly to blame, as it is not planning to lower the Fed rate until inflation cools off, which in turn influences mortgage rates.
However, to be fair, “the Fed isn’t the only factor influencing mortgage costs,” said The Wall Street Journal. A multitude of personal financial factors also help determine what mortgage rate you’ll get — particularly in this rate environment. For instance, “the payoff for having a great credit score has grown as rates have risen,” as have the savings you may reap from shopping around with different lenders, said the Journal.
Here’s what to know about what goes into determining a mortgage rate, so you stand a better chance of scoring the best rate possible.
What personal factors affect your mortgage rate?
So what goes into your mortgage rate that’s within your control? Here are some of the major factors that lenders weigh when deciding what rate to offer you:
Credit score: “The lowest mortgage rates go to borrowers with credit scores of 740 or higher,” said NerdWallet, while rates get “a little higher for borrowers with credit scores of 700 to 739” and “even higher” for those with scores “from 620 to 699.”
Debt-to-income ratio: A debt-to-income (DTI) ratio is “your monthly debt obligations divided by your gross monthly income,” said CNN Underscored. If you have one of “36% or lower,” that “will help you unlock the lowest mortgage rates because it demonstrates your ability to manage debt responsibly.”
Loan-to-value ratio: The loan-to-value (LTV) ratio “compares your loan amount to the property’s price,” and a lower one “typically results in a lower mortgage rate,” said Bankrate. How much of a down payment you make will impact your LTV ratio.
Property type and location: What type of property you’re taking out a mortgage on and where it is located also impacts mortgage rates. For instance, “interest rates are usually lowest on primary residences” compared to a second home or investment property, said Rocket Mortgage. Further, said CNN Underscored, “rates can also differ depending on your state.”
How does the market impact mortgage rates?
Of course, your mortgage rate isn’t entirely within your control — rather, “the overall level of mortgage rates is set by market forces,” said NerdWallet. Specifically, the following factors affect how high — or low — mortgage rates are at a given time:
The Federal Reserve: While the Fed does not set mortgage rates, its actions do have an impact on them. “The Fed can raise or lower short-term interest rates, which indirectly affects mortgage rates. When the Fed raises rates, it becomes more expensive for banks and lenders to borrow money; this translates to increased rates for borrowers. When the Fed lowers rates, it becomes cheaper to borrow money, resulting in lower mortgage rates,” Scott Bridges, the senior managing director for national mortgage lender PennyMac, said to Bankrate.
Inflation: Mortgage rates also tend to move in tandem with inflation. “When inflation increases, interest rates increase so they can keep up with the value of the dollar,” said Rocket Mortgage. Meanwhile, “if inflation decreases, mortgage rates drop.”
Financial markets: A number of financial markets also influence mortgage rates, including “the performance of T-bonds and mortgage-backed securities,” said Bankrate.
The overall economy: Last but certainly not least, the state of the economy impacts mortgage rates. Rates “tend to rise when the outlook is for fast economic growth, higher inflation and a low unemployment rate,” said NerdWallet, and they “tend to fall when the economy is slowing down, inflation is falling and the unemployment rate is rising.”
How can you get the best mortgage rate?
One way to ensure you get the lowest rate is to compare offers from different lenders. This can end up saving you a surprising amount, said the Journal: “Give your financial information to two different lenders, and you may receive very different quotes that mean saving or losing tens of thousands of dollars.”
You can also save by making the most of the factors in your control, such as by working to boost your credit score and saving for a more sizable down payment.