How Mortgage Rates Are Determined, and Why It Matters to You

If you have been thinking about buying a home or refinancing your current property, you probably have noticed that mortgage rates constantly change. Knowing how they are determined can save you money over the life of your loan.

Let's take a look at how it all works:

1. The Economy's Role in Determining Mortgage Rates

The overall health of the economy plays a big role in setting mortgage rates. A strong economy means rates tend to rise, while in a weak economy, rates usually fall. That's because demand for mortgage-backed securities (MBS) is higher; lenders sell these to investors. The Federal Reserve can also influence rates by adjusting interest rates and buying MBS, though it affects rates indirectly.

2. How Your Financial Profile Affects Your Rate

The lender will consider your credit score, down payment, and debt-to-income ratio (DTI) in determining your rate.

Credit Score: The higher your credit score, the better your rate will be; lower scores, due to the greater risk, receive higher rates.

Down Payment: The more you put down, the less the lender has at risk, therefore usually resulting in a better possible rate.

Debt-to-Income Ratio (DTI): A lower DTI makes you more attractive as a borrower and helps to potentially bring down your rate.

3. When to Lock in Your Rate

Mortgage rates change often, so it's critical to know exactly when to lock in a rate. When you lock in a rate, you will be getting that rate for a set period, usually between 30 to 60 days. It may be tempting to hold out, hoping that rates will go lower, but market movements are very hard to call, so taking a good offer by locking in the rate is mostly the best move.

4. Why Rates Vary Between Lenders

There are a couple of reasons why mortgage rates vary between lenders. Some specialize in certain types of loans or borrowers, allowing them to be more competitive with those types of rates. Other lenders will adjust the rate based on current market demand or their business model. Here at Lending by Us, it's our mission to have competitive rates that reflect both market conditions and your unique financial situation.

Conclusion

Your mortgage rate will be determined based on the economy, your financial profile, and the lender you select. By understanding these, you will be able to get a better rate and consequently save money over the life of your loan.