You can’t turn on your television, surf the Web, open your mail or read a newspaper without being bombarded with mortgage rate advertising. But who or what sets those rates? Is it the Fed? Individual lenders? Fannie Mae and Freddie Mac?
All of these entities have some influence on mortgage rates, but it’s a lot more complicated than that. In fact, you have a lot of control over the interest rate you pay. Read on to see what components influence your mortgage rate, and learn how to pay as little as possible for your home loan.
Today’s mortgage rates are driven by ten factors. They are:
Economy: The global financial picture affects all interest rates, including mortgage rates. When the economy becomes uncertain, increased demand for US Treasuries pushes our interest rates lower. Conversely, when the economy heats up, inflation becomes a concern and investors demand higher returns from bonds and mortgage-backed securities. This pushes rates up.
Lender capacity: Lenders cannot process and fund an infinite number of loans. To control the number of incoming applications, they continually adjust mortgage rates—raising them to slow things down, and lowering them when they wish to generate more business.
Property location: Mortgage financing is cheaper in some states than others. Historical loan performance, the amount of competition for business, and laws that make foreclosure easier or more difficult drive differences in rates from state to state.
Property use: Primary residences are considered less risky by lenders, so it costs less to finance them. Vacation property and rentals come with higher fees and stricter underwriting requirements.
Property type: Traditionally-built single family homes get the best rates. Manufactured housing, condos, co-ops, mixed-use developments and multi-family homes have higher default rates, so mortgage rates are higher for these homes.
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