Mortgage rates can be confusing. Rates can fluctuate daily, and if it’s your first time dealing with them, it’s easy to get overwhelmed. Even experienced home buyers and some industry professionals struggle to track mortgage rates!
However, for those savvy customers who want to find the best deal, On Q Financial, Inc. has prepared this guide to help you find the best possible rates available! As a leading independent lender, we’re sharing an inside look at what factors affect rates, how rates may be forecast, and how you can get the best possible mortgage rate!
How Industry Factors Affect Rates
Contrary to what you might think, lenders themselves don’t set mortgage rates. While lenders impact your final APR, several economic and industry factors go into determining mortgage rates.
Before we get into finding the best rate, it’s good to know what factors can affect them such as:
- Prime rate indicator
- Treasury Yield
- Loan Pricing Models
- Risk-based Pricing
When you see the final number, remember that mortgage rates take each of these indicators into consideration.
Prime Rate Indicator
The Prime Rate Indicator is the “lowest average rate” banks offer their most trustworthy borrowers and follow the Federal Reserve funds rate trend. The Prime Rate also impacts small business loans and personal loans.
Industry leaders use this indicator to establish their rates, and this, in turn, influences the rest of the mortgage industry. This describes a Price Leadership model in which competition is mitigated by “base rates.” In this case, the industry leaders, like big banks, have enough influence to establish a base for the entire industry.
10-Year Treasury Bond Yield
Another indicator is the 10-Year Treasury Bond Yield, which accounts for the many mortgages either paid off or refinanced within ten years. If bond yields rise, mortgage rates usually rise with them. The inverse is also true.
Cost-Plus Loan Pricing Model
Lending institutions also typically use the cost-plus loan pricing model. This model assumes that interest rates account for four components:
- Initial funding for borrowers loans
- Operating costs and servicing the loan
- A risk premium in case the borrower defaults on the loan
- Allows for profit margin to acquire a return on capital
Therefore, lenders must consider these factors when determining their rate offerings.
Risk-Based Pricing Factors
Even after considering the above industry indicators, lenders must still consider risk-based pricing factors. This can become a question of how much risk to take and still compete in the mortgage and refinance market. A full evaluation of those risk factors will help decide whether offering a lower rate is the lender’s best decision.
While their credit score partially determines the rate offered to a borrower, it is only in conjunction with all other risk factors. Therefore, a lender may have the flexibility to adjust your interest rate if you have a robust application and better credit score. Independent lenders like On Q Financial, Inc., in particular, have added flexibility with the ability to offer many different loan products. Ask an expert On Q Financial, Inc. Mortgage Consultant for more info!
Loan Term Length
The term length for the loan can make a massive difference in the rate offerings. The lender assumes less liability in a shorter-term length as the borrower’s position is less likely to change within that period. A shorter term also means a higher payment, ensuring that the borrower pays off more of the loan faster, reducing liability.
Predicting Interest Rates
Looking at the indicators we’ve mentioned so far, you may think it nearly impossible to predict rates. Well, the truth is many of these factors ARE difficult to predict! Consider that top economists make their living from predicting economic factors like interest rates, and even they can be wrong.
Still, there are ways to monitor the market for rate shifts, even as a consumer. The Prime Rate mentioned earlier is an excellent indicator of whether rates will rise or fall. If you’re waiting for the right rate to dive into home buying, you may want to watch for changes in the Prime Rate or even set up alerts to track it.
Remember, though, that rates fluctuate. The market may be up for a short period and down for an extended period. Your best bet is to be prepared and ready to act when the time to buy is right, including if a lender offers a better deal than the competition.
How Can You Get the Best Rate?
Now, on to the question on everyone’s mind. With mortgage rates being at the mercy of so many industry and economic factors, it may feel like you have no control over the rate a lender offers. While lenders would love for you to believe that, at On Q Financial, Inc., we want you to get the rate that’s best for you! Our expert Mortgage Consultants will help you find all of your rate options to determine the best deal.
However, there are some steps you can take on your own to help you get the best rate. Aside from special government programs, you can also “buy” a lower rate. Another tactic is to reduce your risk in the eyes of your lender.
Apply For a Low-Interest Mortgage Program
Generally, FHA, USDA, and VA loans offer lower interest rates than conventional loans. Because the government backs these programs, lenders have less liability, allowing them to offer lower rates. The catch is that they come with stricter requirements. Also, securing a government-backed loan does not always mean you pay less for your mortgage. Some of these government-backed programs require mortgage insurance (MI) paid upfront as well as monthly for the life of the loan, so keep that in mind. Reach out to an expert On Q Financial, Inc. Mortgage Consultant for details and to see if you qualify.
Buy Down Points
You may have heard of “buying points” when it comes to your mortgage. Buying points or discount points are an excellent way to reduce your mortgage rate. Essentially, you pay an additional amount at closing in exchange for your lender reducing your rate. Paying more upfront allows the lender to take less risk on your loan. While this could save you money in the long run, consider the additional amount you will need to pay at closing. Our On Q Financial, Inc. mortgage consultants can help you determine where your “break-even” point is and whether it’s worth it for you to buy discount points.
Reduce Your Risk
Another way you can possibly reduce your interest rate is by reducing the risk you pose to your lender. The better you are as a loan candidate, the lower your rate will be, depending on industry and economic factors, of course.
Here are some of the factors that you can control that may get you a lower rate:
- Increasing your income
- Increasing your credit score
- Building more assets
- Reducing your debt
- Placing a larger down payment
Some of these items are easier to accomplish than others but keep in mind that lenders will want to offer lower rates to those candidates who provide the least amount of risk. Paying more at closing or reducing your debt are two relatively quick ways to accomplish that.
Weighing Your Risks
Ultimately, lenders weigh the risks they are willing to take against the opportunity for new clients. It’s not a novel concept, but in a market that questions whether rates will ever hit 0, the consideration of risk is increasingly relevant. Knowing which indicator or risk factors contribute towards your lowest rate may be enough to convince you that now is the time to buy.
For example, at On Q Financial, Inc., low rates alongside simple borrower resources is the strategy. On Q Financial, Inc. knows there is no one-size-fits-all mortgage program. That’s why we’ve gathered an impressive range of products to find the option that’s right for you! Our Mortgage Consultants are experienced in finding the perfect home loan fit from our wide range of products. The best part is our Mortgages Simplified™ journey means less stress and more ways to say yes!
On Q Financial, Inc.. is an Equal Housing Lender. NMLS 5645