The mortgage process is much more complicated than the interaction between you and your lender. Behind the scenes, there are financial experts monitoring the secondary market of investments, bonds, and securities to determine the interest rates that lenders offer. When you are applying for a loan, a basic understanding of mortgage rates can help you borrow wisely.
Why interest rates fluctuate
The Federal Reserve is responsible for determining short term interest rates in order to keep the national economy stable. The ideology behind their adjustments is simple: Raise interest rates to encourage investing, and lower interest rates to encourage spending through borrowed funds. Because the economy is currently lulled, interest rates (and home prices) are at record lows, making it an ideal time to buy a home.
Evaluating an individual’s lending power
In a standard, fixed-rate mortgage, the interest rate for the life of the loan is determined by secondary market conditions. The lender will offer the rate with a marginal increase to allow for a profit to be made from the loan. Adjustable-rate mortgages are calculated in relatively the same way, but the interest is recalculated periodically based on specific indices chosen by the lender.
It is important to note that all individual borrowers are not offered the same rates because the lender makes adjustments based on the credentials of the applicant. Your yearly income, credit score, and the value of your new home are all factors that contribute to the personalized interest rate offered. Your credit score is the most influential factor, so taking steps to improve your credit prior to your mortgage application is beneficial.
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