By Harjit Earnest, KeyBank Capital Region Home Lending Leader
The housing market has topped headlines for the better part of two years. The COVID pandemic and interest rates sent the market into overdrive. If you’re one of the millions of people looking to buy a home and you’re curious about what affects mortgage interest rates, you’re not alone. A mortgage interest rate is an important factor in the overall cost of a home. When you’re in the market to buy, it’s important to understand all the different factors that affect mortgage interest rates, what falling rates mean for your homebuying power, and how lower mortgage interest rates can help you get more home for your money.
What Affects Mortgage Interest Rates
Here are the factors, both macro and micro, that determine your mortgage interest rate:
- Federal Funds Rate: The Federal Reserve raises and lowers interest rates in response to economic conditions, such as trade, inflation, and Gross Domestic Product (GDP) figures. When the economy is thriving, the Fed typically raises interest rates to encourage people to save. When the economy is shrinking, it usually lowers interest rates to encourage people to spend money and to stimulate the economy. The federal funds rate has a direct impact on all types of fixed-income investment products, like bonds, Treasury notes, and fixed mortgages.
- Credit Score: Your credit score has such a significant impact on your mortgage interest rate; the better your score, the lower the interest rate you’ll typically pay.
- Location: Mortgage interest rates vary depending on the state and city your house is in. They’re often based on housing supply and the location’s desirability. Lower supply may drive up interest rates and higher supply might drive them down.
- Down Payment: A higher down payment can lower your mortgage interest rate. If you put down more money on your home purchase, lenders will see you as having more skin in the game and thus being a lower lending risk.
- Interest Rate Type: You can either take out a fixed-rate or an adjustable-rate mortgage. While your interest rate on an adjustable-rate mortgage could initially be lower, it might increase over time if the Fed raises interest rates. On the other hand, if you take out a fixed-rate mortgage, you’ll maintain the same interest rate for the entire term of the loan — unless you refinance.
- Loan Term: The shorter your loan term, the lower your interest rate will typically be. For example, a 15-year fixed-rate mortgage will typically have a lower interest rate than the more common 30-year fixed-rate mortgage.
- Mortgage Type: There are a wide variety of mortgage loans available, from conventional and FHA to VA and USDA. The type of loan you choose will affect your mortgage interest rate.
About the author: Harjit Earnest is Home Lending Leader for KeyBank in the Capital Region. NMLS #480702. She may be reached at 518-612-6011 or [email protected].
Consolidate Debt to Help Meet Your Financial Goals
Consolidating debt – paying off several debts and replacing them with a single balance – can help you manage your budget, stabilize your finances and still put money toward savings.
Why Consolidate Debt?
- Combining multiple debts into one balance gives you fewer bills to pay each month.
- By finding a lower rate – whether through a loan or a credit card balance transfer – you’ll save money by putting less toward interest rates and paying down the principal balance sooner.
- Fewer bills and a planned budget can help improve your credit score when you make your payments on time and avoid taking on more debt.
Healthy Habits to Build
Seeing your income and spending organized in a budgeting document often makes it easier to recognize opportunities for reducing bills, removing discretionary items and finding additional streams of income. The more information you have available, the better decisions you can make regarding paying off debt and building savings.
Owning a home also gives you access to other debt consolidation tools, all of which can make your budgeting easier and lower your interest rates, helping you pay off debt and save for the future.
- Mortgage refinancing – By leveraging the equity in your home for a cash-out refinance, you can get money to help pay off existing high-interest debt. You could also explore a rate/term refinance with the goal of lowering your monthly mortgage payments and using the savings to pay off other debts.
- Home equity line of credit – This solution creates a continuous line of accessible credit based on the available equity in your home. It functions similar to a credit card, but with your house used as collateral. It provides ongoing flexibility, although, it should be noted that your balance and payments month to month may vary.
- Home equity loan – While this option also taps into your home equity, it takes the form of a one-time loan distribution. Because it offers a fixed rate and a variety of repayment term options, budgeting is easy through uniform, planned payments, with no worries about rising interest rates.
Bring Your Financial Goals in Reach
If you consolidate some debt but have multiple monthly debt payments remaining, then you can still effectively and methodically pay down debt. Many different strategies and products are available – and we can help you on your journey toward paying off your debt and reaching your savings goals.