As a real estate professional, it’s common to advise clients on a wide range of topics, from evaluating neighborhoods and property values to answering questions about mortgage financing. Understanding the intricacies of mortgage rates, including how they’re set and the options available, can help you provide homebuyers with the information they need to make informed decisions.
Types of Mortgage Rates
The process of advising clients often begins with explaining that there are two primary types of mortgage rates: fixed and adjustable. A fixed mortgage rate is guaranteed to remain steady throughout the term of the loan, which is typically 10 to 30 years. This consistency makes fixed rates a popular choice for homebuyers who want predictability for their financial planning.
A variable mortgage rate, also called an adjustable rate, can fluctuate periodically throughout the loan term. This fluctuation is typically based on an underlying benchmark interest rate or index. To help mitigate risk, many adjustable-rate mortgages come with caps that limit how much the rate can increase during a specified period.
What Determines Mortgage Rates?
In the United States, the Federal Open Market Committee (FOMC) determines interest rates. This 12-member organization is made up of five Federal Reserve Bank presidents and seven governors of the Federal Reserve Board. The FOMC holds regular meetings throughout the year to discuss the state of the economy. During these meetings, the committee makes decisions about monetary policy, which influences the availability and cost of money and credit.
One of the tools used by the FOMC is the federal funds rate, which is the interest rate banks use when lending money to each other overnight. By adjusting this rate, the FOMC influences overall short-term interest rates charged by retail banks and other lenders. If the FOMC believes the economy is overheating, it might raise the federal funds rate to cool things down. Conversely, if the economy is sluggish, the rate may be lowered to stimulate activity.
In addition, monetary policies of central banks around the world, such as the Bank of England and the European Central Bank, can impact international financial conditions and sway rates in the United States. Factors like treasury note yields, global economic trends, geopolitical events, and fiscal policies can also influence mortgage interest rates.
What Determines Individual Mortgage Rates?
While the factors discussed above influence the market rates for mortgages, other variables can significantly influence the interest rate each individual is charged for a mortgage loan. This includes:
Why do Mortgage Rates Change Over Time?
Mortgage rates fluctuate regularly, often daily. Since these rates directly influence the cost of borrowing, both realtors and homebuyers need to understand the factors behind these movements. This may include economic factors, FOMC rate changes, and a borrower’s changing risk profile.
The Federal Reserve Rate
When the overall health of the economy is doing well, there’s typically a higher demand for loans, including mortgages. To control this demand and keep inflation in check, the FOMC may raise the federal funds rate, which typically translates into an increase in mortgage rates. When the economy is struggling, the FOMC may lower the federal funds rate, encouraging people to borrow and spend so they can help boost the economy.
Prior to offering an interest rate, lenders evaluate the potential risk of lending to each specific borrower. This means that a borrower’s interest rate could shift over time as a result of personal financial changes. For example, an improved credit score can lead to a more favorable rate, while credit challenges might increase the rate for a mortgage loan.
Saving up a larger down payment can reduce the perceived risk for lenders, potentially leading to a lower interest rate. If a borrower’s income increases or outstanding debts are reduced, this can lower the debt-to-income (DTI) ratio, which could lower the interest rate.
Common Homebuyer Mortgage Rate FAQs
How Can You Get a Cheaper Mortgage Rate?
For clients looking for a lower rate, you may recommend that they start by checking their credit score and work to improve it if necessary. This may include paying bills on time and paying down outstanding debts. Increasing their down payment or selecting a shorter loan term may also help them get a lower rate.
Remind clients of the importance of shopping around, as rates can vary significantly from one lender to the next. If a buyer is concerned that rates may rise, they may consider locking in their rate, which guarantees a specified loan rate for a set period. This can help them avoid fluctuations while they search for the right property.
Can I Negotiate My Mortgage Rate?
It is sometimes possible to negotiate your mortgage rates and other fees with a potential lender. Clients should start by doing research to ensure they understand the current market rates. Remind them that having a higher credit score or putting down a larger down payment may give them more power to request rate or fee reductions. In some cases, a lender may be more willing to negotiate if the borrower has other accounts or loans in addition to the mortgage loan.
Finding the Right Rate for Your Clients
Helping your clients secure the best mortgage rate is key to building trust and cultivating long-lasting relationships. As a realtor, your role extends beyond finding the perfect property. It’s also about guiding clients through an array of important financial decisions that will impact their lives for many years.
Partnering with a reliable and efficient mortgage provider can make all the difference. At Keller Home Loans, we prioritize transparency, communication, and comprehensive solutions tailored to fit each client’s needs. With our team by your side, you can help ensure your clients experience a smooth and straightforward mortgage experience. Contact us today to learn more.