What Affects Interest Rates?
Often, people ask, "What are your interest rates?" Without doing a little due diligence on each of the items below, it is very difficult to answer this question accurately. When you are shopping for rates, it is best to be educated on the items below, so you can understand how they can and will affect the final interest rate you are quoted in your home purchasing process.
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- Size of Loan – Interest rates will get progressively better as the loan size increases up to $417,000 (the current conventional conforming limit). Above this amount, loans are considered jumbo loans and the rate may increase with the size of the loan.
- Rate locking period – Generally, the shorter the rate lock term, the better the interest rate. A 15 day lock usually will have a better interest rate than a 30 or 60 day lock.
- Term of loan – Loan terms can range from 10 years to 40 years. Generally, the higher the term, the higher the rate. A 15 year fixed rate loan will most likely have a lower interest rate than a 30 year fixed rate loan.
- Type of loan – There are many types of loans available, and based on which one you choose, the interest rate will vary.
- Closing costs – Your rate can vary if you pay the closing costs or if the lender is paying the closing costs. “No Closing Cost” loans will generally have a higher interest rate. When you are calculating closing costs, be sure to include everything necessary for closing in your figures.
- Points – Discount points can be purchased to lower your interest rate. The amount of points you buy will determine the amount of interest rate savings you gain.
- Escrows - Most lenders will charge slightly higher rates if you decide to pay real estate taxes and insurance on your own rather than escrowing them with your mortgage payment. With some loans, escrowing may be mandatory.
- Pre-payment penalties – Some states still allow lenders to charge pre-payment penalties on loans. In those states, interest rates may be lower than in other states who don’t allow such penalties.
In addition to all of the above factors, volatility in the bond market can have a direct effect on mortgage rates. It is important to understand interest rates may change daily, more than once daily or not at all. It depends on all these factors.