What Determines a Mortgage Rate (and 5 Reasons for a Higher Mortgage Rate)
Buying
For the average consumer, trying to decipher a mortgage rate can feel a bit like learning a foreign language. In addition to the fact that the rates themselves are variable and ever-changing, understanding the top reasons for a higher mortgage rate can be nearly impossible.
In this article, though, we shine some light on this confusing topic.
To learn more about what goes into your mortgage rate, and why you may have a higher mortgage rate than you figured, read on.
What’s in a Mortgage?
Mortgage rates take into consideration a series of complex variables and factors.
That being said, though, there is one factor that stands out above them all: the activity of the 10-year Treasury bond yield. The reason this is important is because most mortgages are either paid in full or refinanced within a ten-year time frame. In light of this, the ten-year bond has a significant impact on mortgage interest rates.
Aside from the bond, mortgage rates also take into account things like a person’s credit score, lending history, and the economic climate as a whole.
Top 5 Reasons for a Higher Mortgage Rate
If you’ve received a quote for a higher mortgage rate, there are likely several factors to blame. The following five are the most common:
1. Your debt to income ratio is high
If you’ve got lots of debt in the form of student loans, auto loans, or credit card bills in addition to the mortgage you’re applying for, your debt to income ratio could be too high. This often results in higher mortgage rates or an inability to be approved for a mortgage at all.
2. You’re applying for a mortgage on a second home
If you’re purchasing a second property as a vacation or rental home, your mortgage rates are bound to be higher. Since buying property on this level makes you a real estate investor in the eyes of lenders, most banks will be somewhat cautious about issuing loans.
3. The type of home you’re purchasing for is subject to a higher mortgage rate
While many home buyers aren’t aware of this fact, manufactured homes are often subject to higher mortgage rates than other types of housing.
4. The loan to value ratio is too high
If the loan you want to take out exceeds the home’s value substantially, you can expect significantly higher interest rates.
5. You’re refinancing your mortgage
If you’re refinancing your mortgage, chances are the rates you’ll receive will be higher than those on a loan issued for the purchase of a home. This is especially true if you’re looking to pull cash from the equity in your home. These types of refinancing mortgages draw an even higher interest rates than a typical refinance.
Understanding Mortgage Rates Isn’t Impossible
While it’s true that mortgage rates are confusing and in constant flux, knowing the five biggest reasons for a higher mortgage rate can help you make sense of the entire financial picture, and take proactive steps to get the best rate possible for your loan.
