Interest Rate Basics
What is an interest rate?
One of the most crucial elements of a mortgage loan is the interest rate. This rate is the percentage of your loan amount your lender charges for borrowing money. Your monthly mortgage payment consists of two parts: principal (the amount borrowed) and interest (the cost of borrowing that amount).
At RoundPoint, we want to make sure our borrowers understand the rate components and how they work so they can make informed decisions. Read on to discover how rates work and what you can do to get the best possible deal.
Interest Rate Changes
What causes interest rates to change?
Whether you are shopping for a new mortgage or managing an existing loan, understanding interest rates is a beneficial skill. Mortgage interest rates can fluctuate frequently and unpredictably, which can significantly impact your monthly payments. But what causes mortgage interest rates to change?
- Federal Reserve: Although the Federal Reserve does not set mortgage rates directly, it does play a powerful role in influencing them. When inflation rises or the economy overheats, the Federal Reserve may increase the federal funds rate which makes borrowing more expensive in an effort to decrease spending. As a result, mortgage lenders tend to raise their rates. Conversely, when rates are cut to stimulate the economy, mortgage rates often fall.
- Bond market movements: Mortgage rates are closely tied to the ten-year United States Treasury yield. When bond prices fall, yields rise, then mortgage rates generally follow.
- Inflation: When inflation is high, lenders generally have higher rates to ensure they receive a return on their investment.
- Economic growth: When the economy is healthy, signified by strong job growth and rising wages, people tend to borrow more. In response, lenders may raise rates to manage increased demand. On the other hand, during slow periods or a recession, interest rates may fall to encourage borrowing.
RoundPoint looks forward to assisting you in navigating and understanding interest rate changes. As a trusted mortgage lender, we closely monitor the many factors that contribute to rate changes to ensure our borrowers always stay ahead of the curve.
Determining My Rate
How is my interest rate determined?
When shopping for a home loan, a frequently asked question is “What will my mortgage interest rate be?” There are many factors that impact your home mortgage rate so it is important to be mindful of them as you consider and begin your homebuying journey. Let’s dive into what sets your interest rate:
- The market and economy: The yields on Treasury notes, mortgage-backed securities (bundles of mortgages sold to investors), and current economic conditions play a role in influencing interest rates. For example, when the economy is strong with low unemployment and higher consumer spending, there is typically an increased demand for credit, which usually results in higher home mortgage rates.
- Federal Reserve policy: The Federal Reserve decides the federal funds rate. Although this does not directly dictate home mortgage rates, it does impact the larger interest rate environment.
- Personal financial profile: Your credit score, income and employment status, debt-to-income ratio (DTI), and down payment significantly drive the rate available to you. Your credit worthiness and loan-to-value ratio (LTV) help you qualify for lower rates.
- Loan type and term: Adjustable-rate mortgages (ARMs) and fixed-rate mortgages offer various terms and benefits based on your current financial picture and future goals. Additionally, the length of the mortgage also contributes to available rates (e.g., 15-year mortgages generally have lower interest rates compared to 30-year mortgages). Check out our Mortgage Calculator to see how different rates and loan terms could impact your payment.
RoundPoint wants to make sure you get the best deal. Contact our Loan Officers for rate reviews and professional guidance!
Interest Rates & Your Monthly Payment
How do interest rates affect my payment?
Your mortgage typically includes four main factors: principal, interest, taxes, and insurance (PITI). Early in your loan term, the interest portion is the largest and is where the bulk of your payment is allocated. Over time, more of your payment goes toward the principal.
Shopping for the best home mortgage rate makes a substantial difference. Using a popular 30-year loan term, let’s review an example:
| Mortgage Amount | $300,000.00 | |
| Interest Rate % | 5.99% | 6.5% |
| Total Cost of Interest Payments for 30 Years | $346,820 | $382,633 |
| Difference | $35,813 | |
That is a savings of $35,813 based on a 0.51% change alone! Our Mortgage Calculator is a great resource to view a more personalized estimate of your payment.
You can always trust our Loan Officers to help you find the best rate so you can watch your savings stack up!
Interest Rates & My Credit Score
How does my credit score impact my mortgage rate?
Your credit score is one of the most substantial factors when determining your mortgage interest rate. A higher credit score tells lenders you are a responsible borrower and a lower risk, making them more inclined to offer you a better rate. A higher score also provides you with access to various mortgage products.
Since many mortgage programs have different minimum score requirements, even a slight increase in your credit score may broaden your program options and improve your rate. Let RoundPoint help you secure a favorable mortgage interest rate!
Lowering My Rate
I already have a mortgage. Can I get a lower interest rate?
Already in your dream home but the current home mortgage rates are lower than what you previously locked into? A common strategy is to refinance when rates fall. Refinancing your current mortgage means you are replacing the existing loan with a new loan at a lower interest rate or a different term.
Contact our Loan Officers to determine if refinancing is a viable rate-reduction option for you.
