Similar principle to other articles already posted here, fixed-rate mortgages are influenced by the current economy and investor expectations. Fixed-rate mortgages are pegged down to long-term interest rates, say the 10-year Treasury note, and are not linked to short-term interest rates controlled by the Federal Reserve Bank. Short-term rates do however affect adjustable-rate mortgages. We commonly call it ARM in the industry. This is because the indexes to which they are pegged are shorter term in nature. Adjustable rate mortgages are frequently pegged to the one-year Treasury or a short-term LIBOR index, either of which is more closely correlated with the short-term interest rates under the Federal Bank’s discretion.

Conservative creditors swagging from record losses from the subprime mess are affecting mortgage rates, too. Lenders are asking for harder underwriting standards on new mortgages. Investors who buy mortgage-backed securities are demanding higher yields to cover them for taking higher risks. These factors have kept mortgage rates from falling lower than they are today. It is difficult to lend money for homes while housing values remain ambiguous, many economists are saying.

If you are lending against something that you believe will continue to fall behind in value, how do you make your loaning rule when you make a loan today and by two or three months down the road, you are upside down on that loan? Over the past five years, 30-year fixed-rate mortgages have ranged from a low of 5.28 percent in June 2003 to a high of 6.93 percent in June 2006. In recent weeks, rates have been approaching those 2006 levels. Fifteen-year fixed-rate mortgages over the past five years ranged from a low of 4.71 percent in June 2003 to a high of 6.57 percent in June 2006. And 5/1 ARMS ranged from a low of 4.99 percent in February 2005 to a high of 6.67 percent in June 2007.

So How Do We Get the Best Rates?

Until the mortgage crises fully wanes, loaners will likely continue to tighten their mortgage lending criteria. You will need proof of stable income, preferably a tenure of two or more years at the same employer, a FICO score of at least 700 score and a verifiable down payment, and maybe cash reserves. That is the typically preferred borrower, who is being offered the best rates. With zero-down-payment loans going the way of the horse and buggy, you can expect to cough up more money at closing to qualify for the best rates. Don’t forget also about the conforming loan limits which vary according to area, but are predominately $417,000. What is this? A conforming mortgage is one that is eligible for purchase or securitization by government-sponsored enterprises such as Fannie Mae and Freddie Mac. It pays to strategize to either make a larger down payment or take up less money so you can get that mortgage under that conforming loan limit and at a lower rate.

Another rate-reducing scheme is to pay discount points or an origination fee upfront. Both fees are expressed as a percentage of the loan amount, and both will decrease the interest rate of a mortgage, but will increase the sum of money you need at closing. On a $200,000 loan, for instance, a 1 percent origination fee will mean $2,000 out-of-pocket at closing. Origination fees may or may not be negotiable. Some lenders will not write a loan without an origination fee. How much do discount points lower your mortgage rate? It depends on what is going on in the mortgage marketplace, but one point usually lowers the interest rate by one-eighth to three-eighths of a percentage point. The general rule of thumb is one discount point equals a quarter-point rate decrease. Paying points generally means scaled down monthly payments and interest over the life of the loan, but you will need to weigh how long you plan to stay in the home to see if the trade-off is worthwhile. If it takes more than 24 to 36 months to pay off the point, it is normally not worth it financially because many borrowers sell or refinance their home within five years.

Related Blog

• Related Blog on How to Get the Best Mortgage Rates
• Federal Efforts Bring Home Mortgage Rates to Its Lowest