Mortgages Rates

What determines the rate of a mortgage? A good question that generally starts with the nature of interest rates. In simple terms, interest rates are adjusted by the Federal Reserve to help control the economy and inflation. Also, its important to understand that interest rates reflect risk. The riskier the loan the higher the rate. Mortgage rates are based on the interest rates that are set by the Federal Reserve. The standard of other mortgages can often be based on the 30 year fixed mortgage.

About Mortgage Rates

As the mortgage industry has become more competitive, mortgage rates have lowered along with he Federal Reserves decrease in interest rates. Still, there is a lot to know about trends in mortgage rates. First, in general terms, you can say that for each lender the 30 year fixed mortgage will have the highest interest rate. Rates will drop as the term of the loan decreases, so 20 year rates are lower and 15 year rates are even lower. For ARMS, the term will have an effect along with the nature of the rate adjustment. 30 year ARMS will have a lower interest rate than 30 year fixed mortgages. A 5/1 ARM will be a higher interest rate than a 3/1 ARM, because the adjustment of the 5/1 ARM is 2 years longer than the 3/1 ARM, therefore its riskier for the lender.

Other Factors that Determine Mortgage Rates

A number of other factors can determine mortgage rates:

Your credit. The better your credit the lower your interest rate.
Percentage of down payment. LTV (Loan to Value) Ratio will dictate your mortgage rate as someone who provides a 20% down payment will likely have a lower rate than someone who only provides a 10% down payment.
Points. Points are where you actually pay a fee as part of your closing costs in order to carry a lower interest rate. Basically, you are kind of paying up front for that interest you save, so you have to do some math to determine if you should take points on your loan if offered by the lender.
Lenders. If you know the lender well, then they may be able to provide a better rate, even if your credit isn't considered A+. Lenders are competitive and some lenders will just lower their rates and closing costs to get your business. It pays to shop around.