Fair 48° F

Home > Archive > May 1, 2008

Understanding Your Mortgage Rate
By Southern Utah Focus
Whenever the chairman of the Federal Reserve announces a rate cut, many mortgage applicants expect a lower interest rate on their 30 year loan.  So, do Fed rate cuts lower mortgage rates?  The short answer is no.  The reality is, neither Ben Bernanke nor the Federal Reserve determine mortgage interest rates.  The Fed can only control the Discount Rate and the Fed Funds Rate.  These are tied to short-term rates (i.e., credit cards, auto loans and equity lines).
So what exactly determines mortgage rates?  Mortgage-backed bonds are known as Mortgage Backed Securities.  These are bonds issued by Fannie Mae and Freddie Mac and their trading behavior affects the direction of mortgage rates.  In general, interest rates move in the opposite direction of the movement in the prices of these bonds.  To put it simply, when these bond prices rise, interest rates decrease. 
This is just part of the story and only explains how lenders produce their advertised rates.  One cannot assume that they qualify for an advertised interest rate because there are many variables in qualifying for a loan, and each individual’s situation is unique. 
Let’s examine some factors that determine your individual mortgage interest rate when applying for a loan.    Keep in mind that every lender assumes risk with every loan they make.  The riskier the loan, the higher the rate of return they want on their investment which means a higher interest rate.  Some of the factors that determine interest rates include the following:
Credit Score.  This is the most important factor in determining your rate on a mortgage.  The higher the score the lower the risk and therefore a lower interest rate is offered.  Conversely, the lower the score the higher the risk and one can expect to have a higher interest rate.
Loan-to-Value (LTV).  This is the ratio of the loan amount to the value of the property.  Is the lender loaning 100%, 90%, or 80% of the property’s value?  Typically the lower the LTV, the lower the rate.  I’ll also mention here that the size of the loan could affect the rate.
Income and asset verification.  Can you verify your income and assets with W2’s, pay stubs, bank and retirement account statements?  Or, are you self employed and receive a 1099?  The more documentation you can provide to justify your financial position, the better the rate.
Credit Report.  You may have a good score but you may also have filed for bankruptcy within the past 2 years, have late payments, judgments, collections, or charge offs.  Any of these will adversely affect your rate and possibly your chances of qualifying for a loan.  File the following under “Everyone needs to know”:  Currently, if you have made a mortgage payment 30 days late within the past two years, the chances of qualifying for a loan are extremely difficult if not impossible.  If you’re having difficulty making mortgage payments, develop a strategy that you can act upon immediately.  Time is of the essence and staying ahead of the situation could save you money and your credit score.
Collateral.  This refers specifically to the subject property.  Is it a “stick built” home in a subdivision or a double wide on piers?  If the home is unique in any way it could impact the type of loan you qualify for and the rate associated with that loan.

If you’re unsure of your situation, consult a professional mortgage lender. They will inform you which programs are available to you and what kind of rate you can expect. 

Harold Nelson is a mortgage broker at Energy Mortgage Corp. in St. George. He can be contacted at energy@harloldnelson.net.

---