5 Factors That Affect Mortgage Rates and What to Look Out For

5 Factors That Affect Mortgage Rates and What to Look Out For

Mortgage interest rates impact the overall cost of your home long-term. Millions of Americans miscalculate how much they’ll pay for their property over its lifetime, which can lead to debt or the loss of their home. To avoid potential downfalls of high-interest rates, let’s look at what factors affect the price you’ll pay for your mortgage, including your financial health.

The Most Important Factors the Impact Mortgage Rates

Keeping a close watch on the current mortgage rates is essential for all homeowners, especially those with variable rate deals. Whether you’re a new homeowner shopping for the best mortgage deal or want to cut down on interest costs, watch out for the following:

1. The Countries Economic Growth

A few factors determine a country’s economic growth, like the employment rate and gross domestic product. Higher economic growth levels usually lead to citizens obtaining higher income positions which generates more cash flow. More money means more consumers looking to shop for loans for homes, cars, and electronics.

The upswing in demand for mortgages makes interest rates more expensive because lenders have less money to dish out. However, due to the pandemic, mortgage rates are at an all-time low which is excellent for variable mortgages and those looking to buy. Banks currently have a lot of money to lend out to prospective homeowners.

2. Interest Rate Type and Loan Term

Loans will come in either fixed or adjustable-rate types and multiple terms.

A fixed interest rate won’t change over time, whereas an adjustable-rate (or variable rate) will have an initial fixed-rate that will go up or down each period. While an adjustable-rate could get you out of a high pay period, there is also the risk you’ll pay more in the future. With a fixed-rate mortgage, you’ll always know the exact amount you’ll pay over the loan period.

The loan term can also significantly affect your mortgage rate. 30-year terms will cost you less in loan cost but more in interest, whereas a 15-year term will cost you less in interest. If you can afford a 15-year term, it’s recommended to pay off your debt sooner.

3. Inflation

Inflation is the decline of purchasing power of a given currency over time. Over time, a unit of currency buys less than it could during a prior period which is usually positive. It means an economy is becoming successful or is maintaining its success. Wages are also supposed to rise with inflation, so goods and services remain in arms reach.

Mortgage lenders have to maintain interest rates at a level that doesn’t erode purchasing power. Mortgage rates will continue to rise year after year as long as inflation remains.

4. Credit Scores

One of the most significant determining factors of your interest rate is a credit score. Consumers with higher credit scores will receive lower interest rates because it decides how reliable you are at paying your loan. Your credit score is calculated based on your credit report’s information, which can rise and fall based on your debt, loans, and payment history.

If you already have a mortgage, a falling credit score won’t affect your current fixed loan payments. However, if you have a bad credit score, you’ll need to improve it if you want to significantly slash the amount of interest you’ll carry on your mortgage.

5. Home Location

Moving to another state can cost you significantly more or less in interest rates for your loan. For example, if you live in Hawaii, your average monthly mortgage payment will be $1,780, whereas a home in Iowa will only set you back $970 per month. Larger, more populated areas like California, New York, and Texas will cost you a pretty penny to live in. Owning a home in middle American is very affordable, and there are plenty of American’s that sell their house every year and move to the country for this reason.


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