How AZ Mortgage Rates Are Determined

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Anyone looking for a new Phoenix area mortgage also wants the best rate for their home loan.  Oftentimes, understanding what drives home loan rates helps obtain the best rate.

How are Home Loan Rates Determined?

First, no person or entity controls home loan interest rates.  Instead, much like stock price mortgage rates move due to secondary market activity.  In fact, home loan rate depend on the yield and price of mortgage bonds.   These bonds are bought and sold daily on an open market much like stocks.

Much like stock prices, bond prices move continuously.  Between 9am and 5pm Eastern Standard Time mortgage bonds are on the move.  Bond price Movement directly moves mortgage rates.  The relationship between mortgage bonds and mortgage rates is inverted.  When mortgage bond prices rise, mortgage rates fall and vice versa.

Base or Par Home Loan Rates

Not everyone gets the same mortgage rate.  Even when locking on the same day at the same time, 2 borrowers can have very different interest rates.  Lenders apply adjustments to a base rate.   These adjustments ultimately cause a rate to increase or decrease (see below for more).  Your credit score is one example of why lenders would adjust your rate.  The lower the credit score, the higher the interest rate and vice versa.

Why do Mortgage Lenders Adjust Rates Based on Credit Score?

Mortgage lending is based on risk.  Risk in this context equates to a borrower making their mortgage payments.  For example, assume 2 borrowers apply for a $300,000 home loan.  Client #1 has a 620 credit score while client #2 has a 780 credit score.  Based on client #1’s credit score, they represent a larger risk.  Her credit score states that she does not manage her finances/bills as well as she should.

In this case Client #1’s interest rate is higher than Client #2’s.  The higher interest rate compensates for the added risk associated with Client #1.   Is this a punishment for Client #1 for having a lower credit score?  Not at all.

Other Factors That Impact AZ Mortgage Rates

Below is a list of different criteria that can cause an interest rate to vary from the “base rate” described above:

  • Property Type (condo, 2-4 unit etc..)
  • Occupancy Type (Investment purchase, rental property, owner occupied)
  • Transaction Type (purchase, refinance, cash out refinance)
  • Loan To Value
  • State

Bait and switch lenders post generic quotes either online.  Make sure the quote you receive is relative to your specific scenario.  “What are today’s rates” is a loaded question (at least it should be).  Your AZ mortgage lender should ask questions before quoting you a rate.

By Jeremy House

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