When evaluating your financial situation and determining the right mortgage for you, there are a variety of factors. Down payment amount. Length of the loan. Origination fees. Interest rates. While the first three are usually pretty straightforward, your interest rate is something that can be difficult to get a handle on and has a long term impact on your loan.
If it’s been a while since your 11th grade economics class, we’ve put together a little crash course on interest rates. Originally developed to ensure stable prices and liquidity for the economy – making sure that the money supply is neither too large or too small – interest rates determine how much you’ll pay each month as well as the total payments over the life of your loan.
Who controls interest rates?
Mortgage rates are determined by the market – similar to stocks and bonds. When you agree to your loan, your lender most likely turns around and sells that loan on a secondary market. The most common buyers of mortgage loans (or mortgage-based securities, as they’re called), are Fannie Mae and Freddie Mac. So, mortgage rates are determined on this secondary market – where mortgages are bought and sold.
When your lender sells your mortgage, that allows them to get their money back quickly and with a profit so that they can continue lending money to clients like you.
Investors in this secondary market collectively determine the interest rates. The more demand for mortgage-based securities, the more investors will pay for them, and the lower the interest rate will be for you, the consumer.
How often do they change?
Like a traditional stock market, interest rates are constantly changing. It can be difficult and time consuming to track all of the dips and spikes that interest rates take during the course of the day. To add a bit of stability, loan officers typically receive a rate sheet every morning that contains pricing for that day. Those rate sheets are usually determined by individual banks.
This means, you may see slight variations between banks and lenders – even if you talk to them on the same day.
The volatility of interest rates highlight the importance of getting a rate lock as soon as you’re serious about moving forward with a lender. A rate lock is essentially a commitment between you and your lender that you both agree to the rate offered. Usually good for 30 days, rate locks allow you to take advantage of a lower interest rate, even if the market spikes soon after your agreement.
What factors control interest rates?
There are several factors that lead to interest rate changes and most are related to the attractiveness of mortgage-based securities on the secondary market. As mentioned, the more demand, the lower the interest rates. Therefore, interest rates tend to fall when U.S. stocks are falling, foreign markets are struggling, and unemployment is rising. These factors all make the fairly conservative mortgage-based securities an attractive investment.
Alternatively, interest rates are prone to rise along with stock prices and in the event that inflation is expected to speed up.
What is considered a good interest rate?
Your particular mortgage type, credit score, and planned down payment will all affect the rate you’ll be able to lock in. Those factors make it difficult to generalize across the industry. A good score for you may be a GREAT score for someone else but higher than expected for yet another borrower.
However, according to the Freddie Mac Primary Mortgage Survey, the average rate for a 30-year mortgage in 2017 was 3.94%. In general, anything above 5% is considered very high while rates below 3% are considered very low.