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How Are Mortgage Rates Determined?

A mortgage rate is like the time displayed on a digital wristwatch: You see a number, but you don’t see the complex calculations concealed beneath.

Since August, mortgage rates have lingered near the lowest levels in three years — right around 4% APR, according to NerdWallet’s daily mortgage rate survey. The factors that determine the rates you’ll get are mostly beyond your control. But you have influence over some of the elements that determine your rate.

Mortgage rate factors that you control

Lenders adjust mortgage rates depending on how risky they judge the loan to be. The riskier the loan, the higher the interest rate.

When judging risk, the lender considers how likely you are to fall behind on payments (or stop making payments altogether), and how much money the lender could lose if the loan goes bad. The major factors are credit score and loan-to-value ratio.

Credit score

The lowest and best conforming mortgage rates go to borrowers with credit scores of 740 or higher, according to loan pricing documents from Fannie Mae and Freddie Mac.

Interest rates tend to be a little higher for borrowers with credit scores of 700 to 739. For borrowers with credit scores from 620 to 699, mortgage rates are even higher. These borrowers might find it difficult or impossible to get high-amount jumbo loans.

With a credit score below 620, the interest rates are even higher, and options are fewer. Most of the loans available at this level are insured or guaranteed by the government.

Loan-to-value ratio

The loan-to-value ratio measures the mortgage amount compared with the home’s price or value. If you buy a house for $100,000, put $20,000 down and get an $80,000 mortgage, you’re borrowing 80% of the home’s value, so your loan-to-value ratio is 80%.

If your loan-to-value ratio is greater than 80%, it’s considered high, and it puts the lender at greater risk. This may result in a higher mortgage rate, especially when combined with a lower credit score. The loan will usually require mortgage insurance, too.

Other factors

Lenders may charge more for cash-out refinances, adjustable-rate mortgages and loans on manufactured homes, condominiums, second homes and investment properties because they are deemed riskier.

Mortgage rate factors beyond your control

The overall level of mortgage rates is set by market forces. Mortgage rates move up and down daily, based on the current and expected rates of inflation, unemployment and other economic indicators.

Overall economy

Mortgage rates tend to rise when the outlook is for fast economic growth, higher inflation and a low unemployment rate. Mortgage rates tend to fall when the economy is slowing down, inflation is falling and the unemployment rate is rising.

These economic signs don’t point in the same direction at all times. During the long economic recovery after the Great Recession, the inflation rate stubbornly remained below the Federal Reserve’s target of 2%. Meanwhile, the economy kept growing, and the unemployment rate fell to its lowest level in about 50 years. Mortgage rates remained relatively low.

Inflation

Rising inflation is often accompanied by rising interest rates, because when prices go up, the dollar loses buying power. Lenders demand higher interest rates as compensation.

Low inflation over the past 10 years has contributed to low mortgage rates. The 30-year fixed-rate mortgage has lingered below 5% for most of the past decade, a historically low level. In Freddie Mac’s weekly survey, the 30-year fixed rate averaged 4.12% in the 10 years ending October 2019; it averaged 6.35% in the 10 years ending October 2009.

Job growth

Until around the time of the Great Recession, job growth signaled an expanding economy, higher wages and rising interest rates. Yet every month since October 2010 has had growth in the number of jobs, according to the Department of Labor, but economic growth has been inconsistent, weekly wage growth has remained muted and mortgage rates are still finding room to fall.

The connection to higher rates that job growth once had may no longer be as clear. However, the monthly employment survey is still one of the mortgage industry’s most-watched economic reports because “maximum employment” factors into each decision the Federal Reserve makes.

Other economic indicators

Mortgage investors pay attention to many economic trends besides inflation and employment — including retail sales, home sales, housing starts, corporate earnings and stock prices.

Federal Reserve

The Federal Reserve doesn’t set mortgage rates. The Fed raises and cuts short-term interest rates in reaction to broad movements in the economy. Mortgage rates rise and fall according to those same economic forces. Mortgage rates and Fed rates move independently of each other, but usually in the same direction.

Why lenders charge different rates

Mortgage rates aren’t the same from one lender to the next because lenders have different appetites for risk, dissimilar overhead costs and varying capacities during busy periods.

Because not every lender charges the same rate and fees, it’s smart to comparison-shop for a mortgage because you could save thousands of dollars over the life of the loan. And now that you understand how mortgage rates are determined, you’re more equipped to ask informed questions when you shop lenders.

More From NerdWallet

  • Compare current mortgage rates
  • Calculate how much house you can afford
  • Follow these tips for first-time home buyers

Holden Lewis is a writer at NerdWallet. Email: hlewis@nerdwallet.com. Twitter: @HoldenL.

The article How Are Mortgage Rates Determined? originally appeared on NerdWallet.

Realty Solutions Group was built around a simple but elusive concept: provide brokers and clients with the highest level of service in the industry through cutting-edge sales, marketing programs and a culture that values innovation, relationships and a strong local focus.

In less than 5 years, Realty Solutions Group is among the top independent brokerage firms in S/E Wisconsin.

As a locally-owned, independent company, Realty Solutions Group is deeply committed to supporting the communities and clients we serve. We are constantly evolving, but remain focused on that one simple idea behind our founding.

We are a full service brokerage with discounted commissions. We offer no long term listing contracts, a Performance Guarantee, Smart Seller Program and a Communication Guarantee. Contact us today and let us provide you with the very best real estate experience.

How to Buy a House Without Help From Your Family

On the highway to homeownership, coming up with a sufficient down payment continues to be one of the biggest roadblocks. In fact, many prospective home buyers, particularly first-timers, find it hard to overcome this challenge without the kindness of loved ones.

Among recent home buyers age 28 and younger (who are more likely to be first-time home buyers), 28% got down payment help from a relative or friend, according to a 2020 report from the National Association of Realtors. With home buyers ages 29 to 38, 21% relied on down payment gifts.

But turning on the family money faucet isn’t an option for everyone. And not all home buyers have friends with spare cash to contribute. That’s OK; you can help yourself buy a house. Here’s how:

1. Coddle your credit score

A higher credit score is the key that unlocks low-down-payment mortgage options, down payment assistance programs (more about those below), and attractive mortgage interest rates. Credit scores aren’t based on how much money you make, but how you manage the money and debts you have.

How to do it: Check your credit report often and fix any errors, keep your credit card balances low and pay them off when you can, and avoid late bill payments like the plague.

2. Seek out low-down-payment loans

Many people think you need a 20% down payment to buy a house — but they’re wrong. Qualified buyers can get a conventional loan with a down payment as low as 3%, an FHA loan with 3.5% down, or VA and USDA loans with no down payment at all. Lower down payment requirements can reduce the amount of time needed to gather sufficient funds, which means you may be closer to your housewarming party than you think.

How to do it: Contact lenders that specialize in low- and no-down-payment mortgages, to get a list of qualification requirements. If you’re not ready now, ask what you can do to get ready.

3. Take advantage of down payment assistance

Nearly every state offers a down payment assistance program for first-time home buyers. Some city and county governments offer assistance as well. These programs may provide grants (read: free money), as well as zero-interest forgivable or deferred-payment loans you can use as a down payment. These programs often have income limits and credit score requirements, and they may require you to complete a home buyer education class.

How to do it: Investigate first-time home buyer programs in your state. Read over the eligibility requirements for down payment assistance. If you have questions, talk to a participating lender or contact the agency directly.

More From NerdWallet

  • Here’s the credit score you’ll need to buy a house
  • 8 first-time home buyer loans and programs
  • How to qualify for first-time home buyer benefits
Beth Buczynski is a writer at NerdWallet. Email: bbuczynski@nerdwallet.com. Twitter: @bethbuczynski.

The article How to Buy a House Without Help From Your Family originally appeared on NerdWallet.

 

Realty Solutions Group was built around a simple but elusive concept: provide brokers and clients with the highest level of service in the industry through cutting-edge sales, marketing programs and a culture that values innovation, relationships and a strong local focus.

In less than 5 years, Realty Solutions Group is among the top independent brokerage firms in S/E Wisconsin.

As a locally-owned, independent company, Realty Solutions Group is deeply committed to supporting the communities and clients we serve. We are constantly evolving, but remain focused on that one simple idea behind our founding.

We are a full service brokerage with discounted commissions. We offer no long term listing contracts, a Performance Guarantee, Smart Seller Program and a Communication Guarantee. Contact us today and let us provide you with the very best real estate experience.

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