How FHA Mortgage Rates Impact Your Loan, and What You Can Do About it!
There are many factors that impact the total cost and monthly payments on your loan. One of the most important is the interest rate. While a single percentage point may not seem like much, over the course of a 30-year loan it can equal thousands of dollars. That’s why understanding FHA mortgage rates is so important.
Just look at a 30-year mortgage loan of $400,000. Using our mortgage calculator, we see that at 4.0% interest, there is a monthly principle and interest payment of $1,910. This means a total of $687,600 to pay off the loan. However, if we have the same loan but with a 4.5% interest rate, the monthly payment is $2,027, for a total of $729,720. That’s a difference of over $42,000 for only half a percent on interest.
Clearly interest rates matter, so if you are seeking an FHA loan, you need to know how rates are determined and how you can lower the interest.
FHA Mortgage Rates and Your Loan
Determining FHA Mortgage Rates: The Universal Factors
Many factors are involved in FHA loan rates, and some are aspects that you have no control over. The overall economy, decisions by the Federal Reserve, and demands from bond investors impact mortgage rates, and these factors are essentially out of your control.
The basis for FHA mortgage rates is the Fed Fund Rate set by the Federal Reserve, a group of appointed financial experts who study the market and seek to make adjustments that stabilize and strengthen the national economy. The Fed Fund Rate is the rate that banks loan money to each other, and it directly impacts the rates that are available to homebuyers.
Investors selling bonds can also cause a change in FHA mortgage rates, as bond yields change depending on the overall health and wellbeing of the economy. Economic conditions, combined with investor confidence, will have a profound change on the interest rates of FHA mortgages.
These are the foundational factors that you can’t control, but there are also personal factors that impact individual borrowers. Fortunately, borrowers have control over these factors…
Personal Factors that Impact Your FHA Mortgage Rates
Lenders are highly concerned with balancing risk, and interest rates are an important factor for reducing the overall financial risk of a loan. If a loan has a higher statistical chance of default, then the lender will usually charge a higher interest rate to compensate for that risk.
It’s all about risk, but the lender will consider factors and variables to determine exactly where that risk stands. One of the main variables they will use is your credit score, which itself is made of a variety of factors, including payment history, debt loads, and use of available credit. Most people realize that if you have a higher credit score (meaning less risk to the lender), you will get a lower rate, so we won’t dive deeply into this topic.
Downpayment / Loan-to-Value Ratio
When it comes to lowering interest rates, the more you can bring, the better. Large downpayments serve two important purposes. First of all, they help reduce the total loan balance, which statistically reduces risk to lenders. Second, having a high downpayment indicates that you are a financially responsible person who can budget mindfully and save thousands of dollars. Although a downpayment is certainly not a guarantee of wise financial management, it is a sign.
For FHA loans, you will generally need to bring either a 3.5% downpayment or a 10% downpayment. If you have a score of 580 or higher, you will be able to secure the loan you need with only a 3.5% downpayment. However, if you have a credit score between 500 and 579, you will need at least 10% down on the loan.
The loan to value ratio, or “LTV,” is another factor that is worked into your FHA mortgage interest rates, but it is tied directly to your downpayment. Basically, it’s another way of expressing your downpayment. If you bring a 10% downpayment, and the loan covers the remaining amount, your LTV is 90%.
The debt-to-income ratio is an important part of your loan approval, and it can have a direct impact on the overall interest rate you pay. This is simply an expression of your total debt payments compared to your total income, and it’s usually figured on a monthly bases. For example, if you have $2,000 in debt payments every month, and bring in a monthly salary of $8,000, your DTI is 25%. For most loans, lenders like to see a DTI somewhere around 43% or lower; if your DTI is higher the loan may not be approved or you will have to pay a larger interest rate.
Used in many different types of loans, discount points are paid at closing to the lender to reduce interest rates. In most cases, one point will equal 1% off the loan, and the lender will determine how much a single point will cost. Essentially, you are prepaying interest when you use discount points.
By lowering your credit score, you may be able to purchase a larger, more expensive home.
Tips for Lowering FHA Mortgage Rates
It is always possible to lower your interest rates, and while you can’t do anything about the universal factors (Fed Reserve rates, bond activity, etc), you can make changes to your personal situation that help deliver a lower interest rate on your FHA mortgage.
Look at the above personal factors and see if any can be improved. For example, could you lower your debt-to-income ratio to ensure lenders see a low-risk borrower. Paying off debts, and keeping your debt load low can increase your credit score and improve your standings as a borrower.
If the loan amount is increasing your interest rate, perhaps you could look towards lower-priced housing, which will help you secure a smaller loan and improve your LTV.
Get More Information on FHA Mortgage Rates
If you want to learn more about FHA mortgage rates and how they impact your loan, contact the staff at San Diego Purchase Loans today. We’ll make sure you get the right information to make a fully informed decision on your next home purchase!