What drives interest rates?

Rates, rates, rates! It's a big topic of discussion for good reason, but it's not the end all be all when it comes to whether you should be buying a house in this market or not. That being said, it's important to understand how interest rates are determined so you can make informed decisions. There are usually three main factors that determine the rates being offered: the Federal Reserve and the fed funds rate, the health of the US economy (think supply and demand, job data, inflation, etc.), and finally… you, the consumer. Sound familiar? You’ve probably been told before that rates are influenced by these factors, but let’s dig a little deeper and understand what each one is and what role it plays in your homebuying journey.

First up, the Federal Reserve. It seems like everyone is talking about “the Fed” these days… but beyond the buzz, what is the Federal Reserve? Essentially, the Federal Reserve is an agency that regulates the United States money supply and general interest rates. Its primary goal is to influence the overall economy, in part by controlling the federal funds rate. This is the rate at which banks lend to each other overnight, influencing the overall economy based on the interest rates charged in these transfers. The interest rate you see on mortgage loans, cars, and even credit cards is partially related to how many securities the banks are lending; the more they buy, the lower the rate, and the more they sell, the higher the rate. 

This cycle of rate changes brought on by the amount of transactions, for better or worse, is known as supply and demand. Both the Federal Reserve’s decisions and consumer spending directly influence supply and demand. When individuals, businesses, and the government want to borrow more money (demand is high), interest rates tend to rise. If demand for borrowing is low, interest rates tend to fall, as lenders need to offer lower rates to attract borrowers.

Finally, and arguably most importantly, YOU have more control in the market than you think– on both an individual and collective level. Collectively, the Fed monitors consumer behavior and spending– like what we’re spending, how much debt we have, how much we are saving– and adjust their own spending accordingly. While you are a part of that, you mostly control what you contribute on an individual level; the more you save and the less you spend, the lower your mortgage rate can be when talking to your loan officer. 

 

 

How much can I borrow?

Imagine your borrowing power as a jigsaw puzzle; before you can see the finished product, you have to figure out how all the pieces fit together. When working with an X2 Mortgage broker, our job is to find the most effective way to put these pieces together to create the big picture. Some things that loan officers consider when determining borrowing power are FICO, or credit score, DTI (debt to income), and how many assets can be put towards closing costs or a down payment. This creates the frame of the puzzle, giving lenders an idea of the big picture and enabling them to assess how much risk is present with the loan. Once this is established, the rest of the pieces can be put together to create the final product: a mortgage that fits your financial situation.

 

What are mortgage points?

Mortgage points are fees paid when closing. There are two types of points: discount points and origination points. It’s important to understand the difference. 

Discount points go towards reducing the interest rate, creating an option to buy down the rate on your loan. Each point typically costs 1% of the loan amount and usually reduces the interest rate by about 0.25%, though this can vary by lender and market conditions. Working with your loan officer, you determine if buying down a part of your rate can save you money over the life of your loan. There are also point based programs that help you save money over the life of your loan, like a 2/1 buydown program .

Origination points go toward the fees associated with processing a loan application and are typically seen on closing documents (CD). These points have no effect on your interest rate, but impact what you pay out of pocket to get a mortgage loan. Here at X2 Mortgage, whenever charge origination fees to the borrower, putting more money in your pocket at closing. 

 

 

What credit score do I need?

The credit score you need to qualify varies by loan program and lender. At X2 Mortgage, we offer 20+ loan programs and lenders to find the best deal every time. 

 

The most common loan programs for the average consumer are Conventional, FHA, VA, USDA. While no two loans are the same, knowing the general criteria for these loan types can be helpful. Each program has its own credit and qualification requirements.  

 

Conventional:

To qualify for a conventional loan, you will need at least a 620 credit score. Credit scores help determine your interest rate, so a more ideal credit score for conventional loans is 700 and above. 

 

FHA (Federal Housing Administration): 

The Federal Housing Administration’s mission is to help as many people get into a home as possible. With a 3.5% down payment, you can have as low as a 580 credit score; with 10% down, you can qualify with a 500 score. 

 

VA: (Veterans Affairs):

The Veterans Affairs doesn't set a minimum score for their borrowers, and analyzes borrowers past repayment practices to determine risk by looking at credit reports, accounts, and other borrower information. 

 

USDA: (U.S. Department of Agriculture):

USDA loans have strict eligibility criteria, including income limits and property location requirements, as they’re intended for rural homebuyers. With specific USDA programs, they also analyze borrower's willingness and ability to handle and manage debt. 

 

 

Do you offer preapproval or prequalification?

 

Prequalification is a general overview, and preapproval is a formal, in depth overview; in every state except Arizona, the prequalification is done first, followed by the preapproval. A preapproval is a way to show that you have talked to your mortgage broker and, based on a brief snapshot of your financial situation, you have been approved to move forward while more in-depth information is gathered. 

 

In Arizona, approval happens before qualification. In Arizona, a prequalification is determined after a borrower gives the loan officer all of the financial documents required, purchasing power is determined, and your credit score is pulled. The green light is given when your broker gives you a ‘pre qualification’ form to you and your realtor. A prequalification form is necessary when putting down an offer on a home so sellers can take you seriously. 

 

 

 

 

Is refinancing appropriate for me?

 

Refinancing can be a great way to save money every month, reduce your interest rate, and possibly skip the next month’s mortgage payment. What determines if refinancing is good for you? Loan officers at X2 Mortgage analyze something called a net tangible benefit. A net tangible benefit is something we take very seriously, to analyze if it makes financial sense for your specific situation. We will take the amount of money you will pay to refinance, combined with what you will save every month, and make sure that you will be saving money in the long run.

It’s important to ask your loan officer/broker about the benefits of refinancing. Ask questions like will it change your interest rate, will you be able to get cash out, or potentially get rid of your mortgage insurance? 

 

What is an Annual percentage rate?

 

An annual percentage rate, or APR is a rate determining how much you will pay in interest over the life of your loan. This includes things like interest you will pay for the loan amount (interest rate), and the fees that come at closing; such as origination fees, points, and title fees.

 

 

What are Closing Costs?

 

Closing costs are what they sound like: money you need to bring to the table to close your real estate transaction. While your realtor will be the one helping negotiate these with the seller, it’s important to know what all goes into your mortgage transaction.

Closing costs can vary from 2.5-5% of your loan amount and apply to both buyer and seller.

 

As a buyer, closing costs include: 

 

Origination fee: The fee for setting up your loan. X2 never charges an origination fee.

 

Application fee: X2 does not charge you any application fee. 

 

Credit fee: Cost to pull your credit report 

 

Mortgage points: If you choose to pay down your mortgage, or are in a 2/1 buydown, they will show here. 

 

Appraisal and inspection fees: Appraisals show that the home’s value matches the loan amount. Inspections analyze the property’s conditions, issues, and safety concerns.

 

Title fees: Title insurance is there to protect you from any future claims on you holding title or to make sure there are no liens on the property. 

 

Recording fees: Charged by the city/county the property is purchased in 

 

Property taxes: Property taxes are required to be paid on every property, and are usually annual fees. 

 

As a seller, closing costs include:

 

Realtor commissions: Usually the largest expense on the transaction; recent changes to these fees were introduced in the Buyer-Broker agreement. Read more here. 

 

Owner's title insurance: Depending on the policy, this can range from a few hundred dollars to a grand. This is necessary because it protects any issues with the property title. 

 

Wire transfer fees: Fees for transferring funds that may be charged by institutions.

 

Recording fees: Charged to the seller by the city/county to record property transfers.

 

HOA fees: There may be prorated costs at closing.

 

Property Taxes: Sellers pay any outstanding taxes at closing, depending on the time of year. 

 

 

What does your mortgage payment include?

Understanding your mortgage and payment is crucial. While your loan officer will deliver all this information on a loan estimate (LE), and again at closing on your CD, it’s a good idea to break it down step by step. 

Your mortgage payment may be referred to as PITI, or principal, interest, taxes, and insurance. This is a breakdown of what you will pay every month. 

Each month you will pay an amount called the Principal which is money going strictly to your loan amount. 

Interest is expressed as a percentage, which is how much money you pay for borrowing the money in the first place. 

Taxes are usually determined by what county you live in. 

There are two different kinds of Insurance, Homeowners and Mortgage insurance. You may or may not have both of these, it depends on your situation. For example, Homeowners insurance is always required as it protects the lender from any damages or risk. Mortgage Insurance is only required on Conventional loans until you own 80% equity, either upfront or during the life of the loan. 

Furthermore, FHA loan insurance has two other categories, and requires this to protect lenders in case of borrower default. FHA insurance consists of two parts: an upfront premium and an annual premium. 

An Upfront Premium is either paid upfront or added to the loan balance. This is 1.75% of the loan amount.  The Annual Premium is based on the loan amount, term, and LTV ratio, all of which you will see on the CD when it’s time to pay. 

 

 

Fixed or adjustable rate right for me?

 

Mortgage loans are either a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM).  Historically, it's more common for home buyers to have the steadiness of a FRM.

A FRM is when your interest rate is set and does not change over the 15 or 30 year term of your loan (unless you refinance). This has advantages, especially for those who do not watch the market indexes and don’t want to worry about things changing post closing. 

 

An adjustable rate, or an ARM, is a rate based on a certain secondary market index called the SOFR. Because this is a different market index,  the interest rate adjusts up or down, depending on SOFR or market conditions. Rate adjustments follow a schedule, with the most common adjustments happening once a year.  For example, a popular ARM is a 5/1 arm. Your interest rate is fixed for the first 5 years, and then it adjusts every year after that depending on what the SOFR market is. Lenders generally offer lots of kinds, most popular being a  3/1, 5/1, 7/1, and 10/1 ARMS. These types of loans may be getting more popular in today's market, as they can offer lower monthly payments in volatile times. 

 

How much can I afford?

This is the number one question we think people should be asking themselves. While it is our job to determine what you qualify for per loan program, it is your job to take that number and see if you can sustain that monthly payment for a long time. While brokers analyze your debt to income ratio,  it's up to the consumer to be aware of their spending habits so it doesn't feel super stressful to own a home. Everyone wants you to stay in your home, and knowing yourself and your financial habits will help you get there.

 

All together now

By gaining a deeper understanding of interest rates, mortgage programs, and the costs associated with closing day, you'll be better equipped to navigate the homebuying process with confidence. We're committed to helping you become an active participant in your financial journey, ensuring you're well-prepared for the closing table and beyond. At X2 Mortgage, our goal is to empower you to take control of your financial future, making informed decisions that lead to long-term success and increased cash flow.