How Do Interest Rates Work?

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Interest rates fluctuate constantly, and it can be difficult to understand how they work. If you're wondering what causes your rate to go up or down, or why it may differ, we have the answers. We'll break down the factors that impact your rate below. First, it's important to understand that interest rates are not one-size-fits-all. Instead, each rate varies by person and financial history. Lower interest rates are offered for shorter-term loans, but you should make sure that your rate and loan type match your long-term goals for your home.

Rate Factors That You Can’t Control

Interest rates are tied to the bond market, meaning mortgage bonds or mortgage-backed securities drive most of the fluctuation. Other factors that affect the rate include inflation, stock prices, and home sales.

Factors That Are Unique to You

Once the rate range is established, your credit score and credit history will be reviewed to determine your risk factor. The higher the risk, the higher the rate. These are called loan level pricing adjustments. The higher a credit score is, the lower the risk you are to a lender, resulting in lower rates overall. Interest rates also fluctuate based on the type of loan. For example, if you're buying a second home or investment property, your rate will be higher because these properties are deemed riskier by your lender. The amount of money used for your down payment decreases your overall risk to a lender. As your down payment percentage increases, your risk decreases because you have more equity in your home. The same principle applies if you're refinancing a home. Essentially, the more equity you have in your home, the less risky you are to a lender. It's important to ensure that the rate you are offered aligns with your homebuying budget and goals. When starting your homebuying journey, it's crucial to consider all aspects of purchasing a home, beyond the purchase price. It's okay to adjust as you move along the process, as long as you never exceed your budget. Your interest rate is tailored to your financial needs. 

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