How Mortgage Lenders Determine Interest Rates?
How Mortgage Lenders Determine Interest Rates on Government vs Conventional Loans?
How mortgage lenders determine interest rates on government and conventional loans are based on pricing adjustments based on several factors. Loan to value is the next factor besides credit scores how mortgage lenders determine interest rates on conventional loans. Loan to value has no impact on rates on Government loans. This is because of the government guarantee by HUD, VA, and USDA. However, conventional loans are not federally backed by a government agency. Therefore, the lower the loan to value, the lower the lender has layered risk so the mortgage rates are lower.
Lenders view borrowers as lower-risk borrowers if they are putting more down payment on conventional loans. Conventional loans do not require private mortgage insurance for those putting at least a 20% down payment. Borrowers who put a 20% down payment on a conventional loan will get better pricing on rates than a borrower putting a 3% to 5% down payment.
Where Are Mortgage Rates Headed In The Future
Mortgage rates are at an all-time historic low. The coronavirus pandemic did impact the U.S. economy with over 40 million Americans out of work. Many experts thought the U.S. will have another real estate and financial meltdown due to the COVID-19 pandemic. However, that did not happen. The housing market is stronger than ever. Mortgage rates are under 3.0%. The Federal Reserve Board lowered interest rates to zero. The stock markets are reaching the pre-coronavirus pandemic all-time highs. The Central Bank does not set mortgage rates. However, the Federal Reserve Board does set the federal fund rates. The Fed fund rates are the rates financial institutions lend funds to one another. Mortgage rates are forecasted to remain in the 2.0% to 3.0% range. Rates are not expected to go up anytime soon. The housing market is expected to remain strong in the coming several years.
Shopping For The Best Mortgage Rates
Mortgage rates can vary widely from lender to lender. If you have credit scores over 740 FICO, you have the luxury to shop for the best mortgage rates. You can get a loan estimate from a lender and forward that LE to a different lender to see if they can beat the rate. Forget giving them any docs or having the lender run your credit. They can just go off the loan estimate from the original lender. As they quote you a lower rate, get a loan estimate from the lowest rate lender. Keep on repeating the process until you get a rock bottom rate. You have to understand that all lenders have different rates. Lenders have wiggle room when offering mortgage rates. To give you the lowest mortgage rates, the lender needs to reduce its back-end comp plan.