home matters

Making Financial Sense of Mortgage Rates

John Pataky | January 1, 2017 4 MIN READ

Mortgage rates have been a longstanding hot topic among current and aspiring homeowners. It is quite common for those embarking on the homebuying or refinance process to ask their peers, “What’s your rate?” or to ask their lender, “What are rates today?” What new and even current homeowners may not know is that there is not one hard and fast “rate” on any given day. A lot of factors go into the interest rate that a lender offers, and rates are typically determined on a case-by-case basis, which is why the rate that you qualify for can have a significant impact on your monthly mortgage payments and why a change in rates is so important.

It’s All About You: The Anatomy of Mortgage Rates

It helps to understand how a mortgage lender arrives at the rate they ultimately offer you for a home purchase or refinance. First off, during your initial conversation, you should be prepared to discuss: the loan amount you are seeking, the range of home prices you are looking at or current home value, whether you intend to live in the home or rent it out, your credit score, the desired loan term and your location. While this may seem like a lot of information to present upfront, each of these factors can skew the offered rate in one direction or another.

In terms of the property, it’s important for the lender to know the location and desired loan amount, as different counties designate different loan limits. For example, what’s referred to as a “jumbo” mortgage in one county might be any loan amount above a $625,000 threshold, but $417,000 in another. Jumbo loans typically have different pricing associated with the offered rates since the homeowner is taking on a larger obligation owed to the bank.

Once you’ve determined the loan amount and location of the property, you can calculate your estimated loan-to-value (LTV) ratio by dividing the loan amount over the home value or price, whichever is lower. You will likely only have the asking price or a home value estimate available at the time of the application, so keep in mind that ultimately the lender will obtain a home appraisal to determine the actual LTV ratio. A lower LTV—roughly 60 percent or lower—will guarantee more favorable pricing versus anything above 80 percent, which will typically require private mortgage insurance and likely impact the rates you are offered.

Additionally, lenders will take into account your credit score. Creditworthiness is a huge factor that demonstrates your ability to repay a mortgage to a lender. As such, some lenders establish higher mortgage rates for those with lower credit scores, and vice versa.

In regards to the term of the loan, if you are agreeing to pay the loan back earlier, i.e., opting for a 15-year mortgage over a 30-year mortgage, the lender will typically offer a lower rate since you are borrowing the funds for a shorter period.

Lastly, lenders will often offer more favorable pricing for a primary residence versus a second home or rental property, given that homeowners tend to prioritize their monthly payment for the roof over their head.


MORTGAGE SCENARIOS: MINOR RATE SHIFTS, MAJOR IMPACTS

See how a simple change in something like your credit score or a Federal Reserve movement to increase or decrease rates could impact your refinance or purchase. In the following scenarios, we’ve assumed a starting, fixed rate of 4 percent and a loan term of 30 years.

loan amount graphic
loan amount graphic

This is not an advertisement for credit. The rates in the hypothetical example above are for illustrative purposes only and may not reflect actually available rates or terms.


These scenarios illustrate how important it is to manage the factors that you can influence, such as your credit and the down payment amount. Prioritizing good credit practices, monitoring your credit score and saving for a 20 percent down payment (therefore retaining at least an 80 percent LTV) will typically help you avoid a less favorable rate or monthly private mortgage insurance. Keeping an eye on the monthly Federal Reserve announcements also helps indicate if the Federal Funds rate is due to increase, which can ultimately impact the rates that your lender is able to offer you.

The bottom line is that a conversation with your lender will help you outline your options; and rather than simply asking, “What is today’s rate?” you will be prepared to discuss the many factors that go into your mortgage rate determination.

John Pataky
John Pataky
EVP, EverBank Consumer Division
John Pataky
John Pataky
EVP, EverBank Consumer Division
John has long served as a leader in the financial services industry. And today, his focus on our clients' needs drives the strategic growth and evolution of our banking and home lending businesses.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements. comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any home financing decisions.