New American Funding Blog

Understanding What Drives Mortgage Rates

By Shantell Lorraine Nicole Russell   |  August 20, 2015

Understand what impacts the interest rate for a home loan. Mortgage rates are a substantial element of the homebuying process. While you likely know what a mortgage rate is if you have begun your home purchase journey, understanding what drives those rates may not be familiar territory. 

The average interest rates affixed to home mortgages often fluctuate based on a few different factors. Understanding these can help you better comprehend when your chances increase for a lower interest rate. 

Employment patterns 
The number of jobs available and the rate businesses and operations hire new employees impact the average interest rates seen across the nation. The Mortgage Reporter noted strong employment growth will likely also drive up interest rates while a weak job report will keep rates low. 

The stock market 
In 2008 the U.S. experienced a financial crisis. In conjunction with the recession, the housing market bubble burst forcing many homeowners to foreclose on their properties.The stock markets will impact both the Bond and real estate markets directly. Interest rates will reflect the condition of the stock market, according to The Truth About Mortgage. 

The federal reserve 
When money is pulled out of the monetary system, the Fed likely anticipates inflation and interest rates will increase as a result. If cash is added to the monetary system to help stimulate the economy, interest rates will likely decrease. 

Global impact 
The average interest rate will also fluctuate in tandem with geopolitics and other events that occur globally, according to an infographic from Vantage Production. 

Rates will increase if current tensions in the Middle East subside and China improves its gross domestic product. However, rates will fall if the volume of terrorist acts increase or the European economy worsens. 

Mortgage rates will also decrease if natural disasters, such as hurricanes and earthquakes, occur anywhere across the globe.

Scoring a low interest rate 
If you are looking to purchase a home, applying for a home mortgage now might be a good idea. Currently, interest rates are historically low, but as the employment situation and economy improve, you can expect those rates to spike soon. 

While the aforementioned factors impact the average interest rate, you can control certain elements and help secure a lower interest rate for a home loan. 

Credit score control
According to the Consumer Financial Protection Bureau, low interest rates go to individuals who provide more favorable borrower qualifications. For example, a credit score demonstrates your track record for paying back bills. This can help a lending organization determine whether you will be reliable when it comes to paying your monthly mortgage bills. Try improving your credit score as much as you can prior to sending in your home loan application. 

Down payments 
While there are plenty of low down payment options available to qualified borrowers, providing a more substantial down payment can help you secure a lower interest rate and ultimately save you more money over the life of the loan. 

Size of the loan and location of home  
The amount you ask for when applying for a home mortgage can impact the interest rate. A larger loan will usually also be accompanied by a higher interest rate. This is because paying back the loan will likely take longer and there is more at stake for the lending organization. 

In addition, the area the home is located in can impact the interest rate you wind up paying for a home loan. Some states have different pricing which can impact your interest rate. 

Purchasing a home is a substantial investment and becoming more aware of how the interest rate of a home loan is determined can help you decide when to apply for a mortgage and ultimately become the owner of a new home. 

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