When buying a home, a lot has to be taken into consideration: neighborhood, amenities, proximity to the workplace, the condition of the house, and the sales price, to name a few.
When shopping for a mortgage, many times the main consideration is the interest rate. An interest rate is undoubtedly a crucial component of the loan process and comes with plenty of considerations in itself, such as:
- What’s better for me – a fixed rate or an adjustable rate mortgage?
- Are rates trending upward or downward?
- How do I know when to lock in?
- And how is the rate determined anyway?
These are all important mortgage questions. The answers to which may add up to one of the biggest financial decisions of your life.
Fixed rate or Adjustable Rate Mortgage (ARM)?
“Typically if a homeowner is only going to occupy a property for less than 10 years, an adjustable rate mortgage may be more attractive to them,” says Adam DeMario, Managing Director of Contour Mortgage on Long Island. “Depending on their time frame, one would select an adjustable rate mortgage that will offer a lower interest rate than the current market rate for a 30 year fixed rate mortgage, and select an ARM program that would remain fixed long enough to ensure that it won’t move prior to them selling the property. A borrower can select from 1,3,5,7, and 10 year fixed periods. Rates are the lowest for the least amount of time the rate will remain fixed.”
Rates going up or down?
“That is a great question,” says DeMario. “If you were to analyze this on a macro basis, data would suggest that rates are going up. The Federal Reserve is going to be rising short term rates and that will have a small impact on mortgage rates. The best way for an individual to monitor rates is to follow the strength of the economy. A healthy economy, strong employment numbers, and following the yield(rate) on the 10 year treasury, which is a leading indicator with respect to the movement of mortgage rates, is a great way to help understand the movement with rates. The better the economy, a low unemployment rate ( 5% or lower), and data that suggests that wages are improving, would cause rates to rise. This would be reflected with a higher yield for the 10 year treasury. It is currently at 2.23%. I personally don’t see the US economy, unemployment, or wage growth suggestive of what one would call healthy. The participation rate in the labor market is the lowest since 1997 and wage growth is basically nonexistent. Less people are working and those that are, aren’t earning enough.”
When should I lock in?
“To lock or not to lock…that is always the question,” DeMario weighs in. “I firmly believe that unless there is a pending announcement of great magnitude relative to the economy that coincides with the day you are signing your loan application, you should lock at current market rates and focus on something else. If you are able to afford the monthly payment at time of application at current rates, then you should lock your loan.
“Affordability of your monthly payment and pending news announcements relative to the economy are what determines whether or not you should lock at a certain rate at a specific time.”
How is the rate determined?
Long Island Mortgage Rates are determined by risk. How much equity you have in a property, your credit score, and the amount of money you earn, all play a role in determining your interest rate. A borrower putting down 20%, with a 740 median credit score, and whose income is triple the mortgage payment, taxes, insurance, and other payments on their credit report will pay a lower rate than someone putting 10% down, with a 680 median credit score, and whose income is only a little more than double the expenses.
With mortgage interest rates at historic lows, now is a terrific time to invest in the purchase of a new home. With so many determining factors, you will need to speak with a trusted mortgage advisor about your specific concerns, income level, and credit standing to see how to capture the best interest rate over the long term.