 Sam
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 Posted: Wed Aug 25, 2004 11:59 pm Post subject: Factors determining Mortgage Rate |
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Mortgage rates are interest rates for a mortgage expressed as a percentage.When you take a loan, you have to pay it back along with interest. This interest is the price for taking the loan. You repay the debt monthly by paying a part to the principal and the rest to the interest.
The interest rate is determined by various factors:
- Mortgage type: It depends on the type of mortgage you choose. Conforming mortgages usually have lower rates than non-conforming types. The risk factor associated with the latter being more. Mortgage companies as a precautionary measure charge high interest rates with more risky loans.
- Term of the loan:The longer the term for which you take the mortgage,the lower your interest rate will be. But ultimately you will be paying more to the company.
- Amount of loan:The more the loan amount, the more is the interest rate.But the term factor is also to be considered here.
- Type of rate locked-in: You can either take a fixed interest rate or an adjustable interest rate. The fixed interest rate remains fixed throughout the term of the loan and primarily depends on the type of the loan. The adjustable rate starts with a lower rate but when the rate is adjusted it might get higher.
- Points: The more points you pay the lesser the interest rates become.But in reality it is only a tradeoff between paying more now or later. So,check with your lender the actual cost of the loan and then decide.
- Upfront costs: If you make a larger down payment or larger upfront and closing costs, you can avail of a lower rate of interest.
- Credit rating: If your credit score is above 650 you can very easily avail of a lower rate of interest. The better the credit score, the lower the rates (provided it is within the market limits).
- The economy and inflation: The interest rates depend on demand and supply of credit. If the demand for credit increases, the supply decreases, thus the rates rise. If the economy is growing the rates will also increase.The short term borrowing costs are increased by the Federal Reserve and this change eventually increases the mortgage rates to keep the inflation under control. The more the inflation the greater the interest rate. But the trend for mortgage rates is different from other interest rates because the mortgage market is highly volatile. Everyday changes affect mortgage rates.
- The 10-year Treasury yield: The more this index rises the more the rates also rise. This is calculated by the Federal Reserve board and depends on the economy.
When shopping for mortgages you need to compare the interest rates offered by different lenders. Your home is considered your biggest purchase. Actually it is the mortgage taken to purchase the home that is bigger, because you pay interest as well. And you would like to save on this cost by shopping at the lowest rates in the market.
Mortgage Interest Rate along with Annual Percentage Rate (APR) tells you how much your loan will actually cost you. This is the indicator for deciding on the loan type.
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