With the economy strengthening and general expectations for it to continue to be healthy, it’s believed that the Federal Reserve Bank (Fed) will increase interest rates during 2018. The increases are expected to be small and are being done to bring the overall level of short-term rates back to what is considered by economists as a "neutral position."
While that can sound like it will have a big impact on the mortgage rates you would pay as a new borrower, it may not.
How the Interest Rate on Your Mortgage Is Determined
Only short-term or adjustable-rate mortgages react to moves by the Fed. The Fed does not determine mortgage rates on conventional 15- and 30-year loans.
Instead, they are determined by the bond market. Depending on how bond investors view the Fed's actions, the interest rate on long-term bonds may go up or down. The reality is that even without the Fed shifting short-term rates, mortgage rates for longer-term loans can fluctuate depending on what is going on in the bond market.
While you cannot control what happens in the economy, the Fed or the bond market, the other factors that determine your mortgage rate—your credit score, the amount of your down payment, and your loan amount—are all factors you can, and should, control.
Moves You Should Make Regardless of What Interest Rates Do
To ensure you get the lowest rate possible when you apply for your mortgage, you will want to have the highest credit score you can. With this in mind, review your credit score well before you expect to apply for a mortgage.
Specifically, clear up any errors on your reports. Make sure that you don’t have any late items within the last 12 months and, if you do, be consistent and timely with future payments, so those late payments will fall off your record before you apply.
Also, pay down any outstanding balances as quickly as your resources allow. Most importantly, postpone taking on new debt until after your mortgage closes. Lenders look at the amount of debt you have outstanding versus your income. The lower that ratio is, the better.
Other factors impacting the mortgage rate you are offered include the amount of money you’ll need to borrow to purchase and close on your home. To keep your monthly mortgage payment affordable, consider increasing the amount of your down payment. That will reduce the amount you borrow and can lower your mortgage rate.
The Consumer Financial Protection Bureau offers a tool that allows you to enter your information and receive a preview of the interest rate you might expect to see and the factors that influence it. However, talking to a Loan Officer will give you a clearer idea of the mortgage programs available to you, what you can do to get the best rate possible for your circumstances before you apply, so you can plan and budget accordingly.
The reality is that mortgages make home purchases affordable. That is true regardless of the current level of interest rates. While it’s a good idea to be aware of predicted moves in interest rates, taking actions on the mortgage pricing factors you can control will have the bigger impact. Doing so may also leave you in a stronger financial position.