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Thank you for reading First Federal Bank's Mortgage Guide blog series!

In this edition, we are discussing mortgage interest rates, specifically the rate an individual might receive or be offered. Mortgage interest rates are influenced by a multitude of things, including a person’s credit score, the amount of a down payment, loan amount, length of the loan, type of mortgage loan, and overall economic conditions like inflation and Federal Reserve policies.

Credit Score

Typically, the better a person’s credit score, the better the mortgage interest rate. An individual's overall credit past, including payment history, outstanding debt, and credit utilization, are all factors considered in the lending process.

First Fed customers have free access to Credit Score. Check out the Credit Goals feature and learn how to prep your credit for future lending goals!

Down Payment Amount

The down payment for a mortgage is based on the lower of two values: the purchase price of the home or the home's appraised value. The down payment amount affects the loan-to-value ratio (LTV) and whether Private Mortgage Insurance (PMI) is required. (Read more about PMI here.). Since a larger down payment reduces a mortgage lender's risk, a larger down payment typically results in a lower interest rate.

Other Factors that Impact a Mortgage Interest Rate

Although various types of loans exist, each with slight nuances, the factors below impact interest rates for most.

• Loan Term: Shorter-term loans (e.g., 15-year) typically have lower interest rates than longer-term loans (e.g., 30-year) because the mortgage lender's risk is reduced over a shorter period.
• Loan Amount: Larger loan amounts may result in higher interest rates as mortgage lenders perceive them as higher risk. Conversely, a lower loan amount usually has a lower interest rate.
• Loan Type: Different types of mortgage loans (e.g., fixed-rate, adjustable-rate) have varying interest rate structures.
• Loan-to-Value (LTV) Ratio: The LTV ratio is a percentage showing the amount of a loan compared to the total value of the property the loan is for. For example, if someone is purchasing a home that appraises at $500,000 and they need a loan of $400,000 (they have $100,000 to put towards the down payment of the new home), the LTV would be 80%. Typically, an LTV of 80% or below is a good target to aim for. A higher LTV ratio will usually cause the mortgage interest rate to also be higher and vice versa (lower LTV ratio, lower interest rate).
• Debt-to-Income (DTI) Ratio: Mortgage lenders assess the ability of an individual to repay a loan based on their debt obligations and income. Typically, a lower DTI ratio will result in a lower mortgage interest rate. The reverse is also true, a higher DTI ratio will usually cause an interest rate to be higher. (Read more on DTI here.)

Economic and Government Impacts

Mortgage interest rates are also impacted by macroeconomic conditions such as the bond market, oil prices, inflation, the job market, etc. So, personal factors are not the only variables that drive what mortgage rate a homebuyer might receive.

• Market Conditions: The overall health of the housing market and the economy (e.g., inflation) influences mortgage rates significantly.
• Federal Reserve Policies: The Federal Reserve's monetary policy, including interest rate adjustments, also play into mortgage rates .

Trying to anticipate and track the overall mortgage market as well as how personal factors intermingle and impact an interest rate can be challenging. A First Federal Bank mortgage professional can provide expert personal advice, helping to make things understandable and, many times, accomplishing a homebuyer’s goal. No matter the market climate, First Federal loan officers are well-informed about current mortgage rates, rate reduction and down-payment programs, and the loan product offerings that are available. Let First Fed help guide you in your homebuying journey!

Make sure to check out all editions of the Mortgage Guide blog series, providing useful tips and information to enhance your financial well-being. Click here.