A Clear View on how the Mortgage Refinance Rate Affects You

When it comes to real estate there are many players and many rules that create the real estate economy we have today, which for the average Joe looking in, seems to be pretty good. Mortgage refinance rates are low, homes are being sold– maybe not as quickly as they once were but they are still being sold– and things seem to be moving up. Sometimes though the outside picture doesn’t show you all the details and it won’t be a clear view until you try to refinance a home. So to get a better idea of the real estate economy you’ll need to understand the mortgage refinance rate; how it will impact you and how it is molded by the economy.

What is a Mortgage Refinance Rate?

refinanceIf you are asking this question then you’re asking the right question. It’s hard to fully understand the impact of the refinance rate until you understand the rate itself. To put it simply the mortgage rate is the rate of interest charged on a loan. However, there is a lot more to it than that. The mortgage refinance rate is determined by the lender, your finances, your credit score, and the current real estate market. There are even different types of rates like a fixed rate and an adjustable rate. It’s a small number that sports a big financial punch.

The Rates Today and the Economy

When you approach a lender for a refinance it may seem like the rate you are given is plucked out of the industry average and dropped into your loan when in reality rates today are a direct result of the economic conditions. Five years ago the economy fell into a slump and refinance rates dropped. Financial experts had been predicting for a while that the housing bubble was going to burst, so it wasn’t really surprising when it finally did. After this burst three huge factors caused rates to plummet continue to keep it low today.

  • First is the economy itself– have you noticed that when there is a high demand for something prices increase? Hot commodities get snatched up quickly and as a result people pay more for them. In today’s economy real estate is not a hot commodity. When demand is lower than supply rates are lower as well. This creates a real estate domino effect as better rates entice new buyers to buy homes and existing homeowners to refinance.
  • Next we have investors. These are the guys putting money into the economy but they want their money located in investments that are going to be low risk with big returns. In times of economic slumps real estate often proves to be just that. Basically risks are low because a bubble isn’t anticipated and rates are low to entice new home sales and refinances; investors use these conditions to their advantage but in reality everyone can benefit. Their money and the sale of homes help boost the economy which brings the real estate market up.
  • Lastly, we have the government. During times of economic crisis the government usually steps in to drive the market back up. They did this during the Great Depression when they created the Federal Housing Administration and they have done it again now. Their intervention helps keep rates low so homeowners can refinance and recover from the financial blow they experienced during the economic crisis.

Mortgage refinance rates are very much the result of economic conditions, investor activity and government intervention. These three factors tend to make up the cornerstones that determine the rates lenders are able to offer potential customers.

The Mortgage Rate and You

refinanceWhile the three factors mentioned above determine the rate lenders are able to offer customers as a whole, the rate you are offered by a lender is going to be determined by other factors. Lenders take into account all of your finances from your work history to your savings accounts and from debts to assets. In addition to this there are other items that will come into play: the type of rate you choose, the type of loan and the length of the term. You can take steps that may help to reduce the mortgage refinance rate you are offered which can only help your refinance. And of course, there are some factors that will vary depending on the type of lender you choose.

FHA Lenders

FHA lenders are able to offer loans and refinances to homeowners who aren’t able to qualify through conventional sources. In addition to this, for many cases the rate is low-to-average in comparison to the market situation. This isn’t guaranteed across the board but it’s not uncommon. FHA lenders will look at your finances, at your work history and at your credit score. They will take into account your credit report and your debt-to-income ratio as well. Essentially they get a good clear look at your finances and then determine from there the terms of your refinance. Because the loans they offer are insured by the federal government and because they follow the underwriting guidelines of the federal government, they are able to take on more risk and offer a lower rate.

Conventional Lenders

What about conventional lenders? Conventional lenders are going to take a similar snapshot of your finances to the snapshot taken by a FHA lender. However, they will read it a little differently. Typically the lower your credit score the higher your rate is going to be. These lenders aren’t approving loans that are insured by the federal government and they use a different set of underwriting guidelines, which means they have to adjust their rates accordingly. As a general rule of thumb if your credit score is higher than 700 you will want to look into both FHA and conventional lenders as you may get a better rate from a conventional source. If you’re score has dropped below 700 the FHA is often the more lucrative option.

Refinance rates are at historical lows which means your refinance can be a smart financial move. However, just because a rate is advertised doesn’t mean you’re going to be given that exact rate. You may get something higher and you may be able to negotiate something lower. Before you refinance do your homework, plan ahead and be involved in the process so that you can make sure you get the loan that’s right for you