In Episode #48, I spoke with loan officer Martha Salas from Nations Lending about the pandemic after effect on mortgage rates, how right now is a great time to get a loan, and all the details about how to do so. Salas is a favorite guest of mine, this being her third time on the show, and it was a true pleasure to access her deep knowledge in the loan process.
What Determines a Mortgage Rate?
While everyone may know what a mortgage loan is, buyers and sellers alike often struggle to understand what determines the interest rate of a mortgage loan. Fortunately, Salas laid it out for me in a comprehensive way that was still easy to understand.
Simply put, an interest rate is the cost of money that you borrow, which accrues as time passes without the loan having been repaid. The federal interest rate is managed by the Federal Reserve, the banking system of the United States, and serves as a kind of baseline or default rate for anyone in the country borrowing money. It is determined in the short-term by things like national credit card debt and home equity lines of credit (HELOCs), and in the long-term by economic factors like inflation, employment, world events, and real estate sales.
When you go to get a mortgage loan, this federal interest rate is where you start, but depending on factors personal to you and to the property you are looking to buy or refinance, the rate you end up getting will change. On a person-to-person basis, the first thing that a lender looks at is an individuals FICO credit score, which helps them determine if you are a good risk or not. Lenders like to see a FICO score of over 700. They also look at the property type -- single-family homes have the lowest interest rate, while apartment units have the highest -- whether you will live in the property and how much money you make.
All of these factors determine what your mortgage rate will be, but it can be further altered by how much money you can put down (‘equity’) and how long the loan will be for. Lenders like the FHA will only require 3.5% down, but will also require mortgage insurance; for most loans however, borrowers generally put 20% down to avoid the need for this expensive insurance. Loan length is entirely up to the borrower, with lenders offering different loan packages that range from 10-40 years. With these decisions made, your loan officer can present you with a final mortgage rate.
The Pandemic After Effect on Mortgage Rates is Great for Buyers and Sellers
What has been so great about the pandemic’s after effect on mortgage rates is that interest rates are currently at all-time lows, just over 3%. That means borrowing money is cheap, giving more people access to credit.
For potential buyers, now is a fantastic time to get a mortgage and lock-in via a ‘fixed rate’ mortgage, giving them this low rate for the lifetime of the loan. They can afford bigger, more expensive homes because there are larger loans available to them.
For potential sellers, as well, now is a fantastic time to sell for the same reason: buyers have easier access to credit and can spend more on a home. This has driven up demand for homes and increased their sale prices.
While the pandemic has been rough for all of us, perhaps its one saving grace has been its after affect on mortgage rates, making the real estate market absolutely boom.
Salas’ Tips on Applying for a Loan
Salas gave me some tips for mortgage loan applicants that I wanted to share with you:
- Call your loan officer before you start looking for a home. They can help you understand what you will be able to afford and help you make other decisions that will get you the best deal possible when it comes time to apply for a mortgage loan.
- Don’t make any big purchases like a car before you take out a loan. The interest rate of your mortgage loan includes an examination of your debt-to-income ratio, and something like a new expensive car lease can make your rate spike.
- Be mindful of your credit! Building good credit can mean the difference between a 5.5% rate and a 2.5% rate, which comes out to around $900 in savings on a $500,000 loan.
If you are thinking of taking out a mortgage loan or want help understanding how mortgage rates work, Martha Salas is available at 805-890-2008 to schedule an appointment.
