Variables in Mortgage Rates

 

Basically, a mortgage rate is the rate of interest charged in a mortgage transaction. These rates are determined by a lender.

These can be classified as either fixed rates which stays the same for the term of the mortgage, or variable which fluctuates with a benchmark interest rate. Potential homebuyers can also estimate the mortgage rates by looking at the prime rate and the 10-year Treasury bond yield.

These rates also vary from borrower to borrower based on their credit profiles. The averages for these mortgage rates rise and fall with the interest rate cycles which can drastically affect the homebuyers market.

Understanding the rates

For homebuyers looking to purchase a new home using a mortgage loan, the mortgage rates are the top factor being considered. There are other factors being involved in the decision to buy. This includes collateral, principal, interest, taxes, and insurance.

In the transaction, the house is the collateral and the principal is the initial amount of the loan. The taxes and the insurance are usually estimated amount figures since they vary according to the location of the property at the time of purchase.

Indicators

There are some indicators that potential homebuyers can check on when considering a mortgage loan. The prime rate is one. It represents the lowest average rate banks are offering for credit.

Prime rates are used by banks in their interbank lending. However, they also offer prime rates to their quality borrowers with the highest credit. Prime rates typically follow the trends in the Federal Reserve’s federal funds rate which is usually around 3% higher than the current federal funds rate.

Treasury bonds

The 10-year Treasury bond yield is another indicator for borrowers. This yield also helps in showing market trends as well. If the yield rises, the mortgage rates rise as well. If the bond yield drops, mortgage rates will also drop.

Another excellent indicator also involves the 10-year Treasury bond. The connection is that most mortgages are either paid off or refinanced for a new rate after 10 years, even if most mortgages are listed for 30 years.

Deciding the mortgage rate

The lender actually absorbs a level of risk during the issuance of a mortgage. There is always the possibility that the customer might default on his loan.

There are factors that help in determining the mortgage rates. They follow an old rule that the higher the risk, the higher the rate. For lenders, a high rate ensures that they recoup the initial loan amount at a faster rate in case the borrower defaults, and protecting the initial investment of the lender.

Another key component in the assessment on the rate charged on a mortgage is the borrower’s credit score and the size of the mortgage loan he can get. A higher credit score indicates a borrower is more likely to repay because he has a good financial history.

The lender allows the lowering of the mortgage rate because the risk of default is lower. The charged rate ultimately determines the overall costs of the mortgage and the amount of the monthly payment.