How Are Home Mortgage Rates Determined?

One of the best ways to build long term wealth is to own a home. It is important to understand how home mortgage rates are determined so one can save money on interest payments.

Mortgage rates are tied to the base rate

The first thing to know about how mortgage rates are determined is that they are tied to the Fed’s base rate. Although there are many other factors when determining what a borrower’s mortgage rate will be, it will always be rise when the base rate rises, and fall when the base rate falls. The base rate is determined by the Fed, and will be lowered at times to stimulate home buying.

A borrower’s credit score helps determine home mortgage rates

Home mortgage rates are highly dependent on a borrower’s credit history. The credit score tells a lender how risky it is to make a loan to a borrower. The more risky the loan, or the lower the credit score of the borrower, the higher the interest rate will be. It is best for a borrower to check his credit score before buying a home, and if it is low it could be wise to wait until it goes up before purchasing a home. This way lender will charge less for giving a loan out the borrower and the borrower will have more purchasing power.

The terms of the loan can change the mortgage rate on a home

Different terms for mortgages have different interest rates. A fifteen year mortgage is always less than a thirty year mortgage. This is because the lender views a borrower that is approved for a fifteen year mortgage as less risky than a borrower looking for a thirty year mortgage. Also, an Adjustable Rate Mortgage, or an ARM, usually has a much lower rate for the first few years before adjusting to a higher rate later on.

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