How is a Mortgage Rate Calculated?

When it comes to purchasing a home, you need a thorough understanding of a mortgage rate, which is the interest rate charged on a mortgage loan. Your mortgage rate plays a pivotal role in determining your monthly payments and the overall cost of homeownership. So let's take a look at the factors that influence how your mortgage rate will actually be calculated.

The economy. Mortgage rates are closely tied to the economy. Inflation (the increase in prices and fall in the purchasing value of money), the unemployment rate (the number of unemployed people as a percentage of the labor force), and GDP (gross domestic product) growth can all influence mortgage rates. Often, rates increase during times of economic growth because the demand for loans increases. Similarly, rates tend to decrease during economic downturns to stimulate borrowing and spending.

Credit score. A borrower's credit score is an indication of their risk of defaulting on a loan, therefore a person's credit score heavily affects their mortgage interest rate. Borrowers with higher credit scores tend to be offered lower interest rates, and vice versa. The good news is that borrowers can improve their credit scores, which should help them get a better interest rate on their mortgage loan.

Loan-to-Value Ratio (LTV). The loan-to-value ratio represents a comparison of the loan amount to the home's appraised value, and it influences mortgage rates. A lower LTV ratio (meaning the home's appraised value is significantly more than the loan amount) represents less risk to a lender, resulting in a lower interest rate for the borrower.

Borrower profile. In addition to a home buyer's credit score, lenders will look at their employment history, debt-to-income ratio, and other financial factors to determine their level of risk. Borrowers with stronger financial profiles typically qualify for lower interest rates.

Loan terms. The terms of the loan, including the loan amount, the loan term, and the type of mortgage (for example, fixed rate vs. adjustable rate), all affect the mortgage interest rate. Generally, longer loan terms and higher loan amounts result in higher interest rates.

Discount points. Borrowers can sometimes lower their mortgage rates by paying discount points upfront. Each point typically costs 1% of the loan amount and can reduce the interest rate by a certain percentage, depending on the lender.

In conclusion, mortgage rates are influenced by several factors; some can be changed by the borrower (like credit score and financial profile), and some factors are out of a borrower's control (like the state of the economy). Home buyers need a trustworthy loan officer, like our Preferred Loan Officers, to help them get the best deal possible. For example, a Preferred Loan Officer can help a Betenbough Homes home buyer calculate the best way to use the flex cash that Betenbough offers. For some, the flex cash is most helpful as part of the down payment. For others, the flex cash is most beneficial when used to buy discount points on the mortgage rate. 

If you're ready to see what kind of interest rate you would qualify for, what a new home would cost, and what your monthly payments would be, book an appointment with us today!