How Are Mortgage Rates Determined and Calculated?

Mortgage means a legal agreement where the bank lends money in exchange for a property as a debt. And the property will be under bank till the time money is returned with some interest mortgage rates. In some cases people also mortgage their property to a person other than giving it to the bank, it is because they sometimes get better interest mortgage rates on the debt money, but exchanging property as debt to a bank is safer.

Mortgage Rates

Mortgage rates are the interest rates charged on a mortgage. The mortgage rates are mostly determined by the money lender or it can either be fixed. Also, mortgage rates also rise and fall with interest rate cycle. Usually, new home buyers apply for a mortgage loan.

There are a couple of potential homebuyers who can look after while considering a mortgage credit. The rate represents the most minimal normal rate that banks are offering for credit. Banks utilize the prime rate for interbank loaning and may likewise offer prime rates to their bigger credit quality borrowers.

How to determine Mortgage Rates?

Determining mortgage rates yourself is something every home buyer must know about, as the more you know about mortgage rates, the better you’ll be able to negotiate. Do not go with whatever mortgage rate the bank or the broker offers you, search and determine the mortgage rates yourself as well.

At first, you need to search for a low interest rate loan, because of the lower the interest rates, the lower the monthly mortgage payment.

Variety of factor sets the mortgage rates like:

•    The state of the economy

•    Related bond yields like the 10-year Treasury

•    Home Location

•    Down Payment

•    Interest rate type

•    Loan Type

Impact of economic activity on mortgage rates

The bad economic news brings mortgage rates to a lower price, whereas good economic news brings higher mortgage rates.

Inflation (the rate at which the level of prices for goods rises) also highly impacts the mortgage rates. As if the inflation is at peak, the interest rates in the loan will get increased, but in when there is a little risk in inflation, then the mortgage rates as most likely to fall down.

10 year treasury yield bond

Although, the 10 year treasury yield bond is said to be the best indicator to determine if the mortgage rates will fall or rise. If the 10 year treasury yield bond goes up, then expect the mortgage rates to go up as well. And if the 10 year treasury yield bond goes down, then you can expect the mortgage rates to fall too. But do not confuse 10 year treasury yield bond to bond prices, because when the purchased bond increases, the yield bond decreases and so does the mortgage rate.

Home Location

Interest rates also vary according to home location, loan type, loan amount. And to know what interest rate should be on your home loan, you can check interest rate tools that are easily available online nowadays. These tools will help you know the best rates that are available to you and you can check multiple lenders as well. And these lenders can help you know the available perfect rate loan for your home, depending on the location of your house.

Down Payment

The basic rule of down payment is larger the down payment, lower the interest rate. So, try to give the maximum amount of down payment, at least 20% of the total amount, by doing this you will be charged a lower interest rate. And if you cannot pay 20%of the down payment or more, then lenders may ask you to purchase mortgage insurance or private mortgage insurance (PMI). Getting a lower interest rate can save a lot of money as it is the extra expenditure that you are spending on your home.

Interest rate type

Interest rates are of 2 types: Adjustable and Fixed.

Fixed interest rates do not change over the time, whereas adjustable rates have a fixed period of time when they will go up or down on the basis of market rates.

The starting interest rate of an adjustable loan may be lower than the rate of the fixed loan, but over the time it might increase than the fixed loan’s interest.

Loan Type

There is a broad category that you can choose from for a mortgage loan, such mortgage loans are FHA, Conventional, USDA and VA Loans. Various loans have different eligibility requirements. And thus, the rates depend on what type of loan you choose. And to understand the loan type better, consult multiple lenders.

Mortgage Calculator

To calculate mortgage rates, you need to have some significant details about the home loan you are opting. And with basic home loan details, you can easily calculate mortgage rates yourself or you can use a mortgage calculator. Following are the details you need to gather to calculate mortgage rates:

1)    Loan amount

2)    The interest rate on a home loan

3)    Number of years you have to repay

4)    Type of loan: fixed, variable, etc.

5)    The market value of your home

6)    The monthly income

The calculation you use will depend on the type of home loan you have.

If you have fixed rate home loan, then the formula will be:

Loan Payment = Amount / Discount Factor

If you have Interest-Only Loan home loan, then the formula will be:

Loan Payment = Amount x (Interest Rate / 12)

So, this is how the mortgage rate is determined and calculated