What Determines Interest Rate and APR?

There are many factors that determine the interest rate you qualify for when purchasing or refinancing a home.

Ever wondered why you see rock bottom rates advertised but once you’ve gone through the application process, you may not quality for the super low offer? Well, you are not alone; many homebuyers and homeowners get confused when their interest rate comes back higher than what was initially advertised.

This is because there are many different variables that go into assessing the rate you qualify for. Your interest rate is determined by your personal situation, including:

  • Your credit score
  • The type of property you are purchasing or refinancing
  • Your down payment
  • Your debt-to-income ratio
  • Your employment history
  • The term of the loan
  • The loan amount
  • The loan-to-value ratio
  • Your location
What is an Interest Rate?

The interest rate is a percentage of the loan amount that is charged for borrowing money.

What is an APR?

The Annual Percentage Rate is the total cost of the loan. To calculate your APR, take the interest rate and add on the lender fees required to finance the loan. The APR is typically higher than the interest rate because it includes the lender fees.

The Difference Between Interest Rate and APR?

The interest rate is the starting point for determining what you will pay for a mortgage loan. Your APR is calculated after the associated fees are added.

Why interest rates ebb and flow.

The constantly churning currents that determine interest rates can take prospective homebuyers for a rocky ride. Here are some of the primary factors that affect mortgage interest rates.

Inflation
As wholesale prices and the Consumer Price Index rise, so do interest rates.

The Fed
Chairman Yellen and the Federal Reserve determine the near-term direction of U.S. monetary policy, always with the goal of keeping inflation on an even keel.

U.S. Economic Health
Rates go up when the average American’s salary increases. Rates go down when the economy is in decline and unemployment levels are on the rise.

The Stock Market
Typically interest rates and the stock market have an inverse relationship. When stocks go up in value, interest rates rise.

Natural Disasters
Acts of nature, like destructive hurricanes and other calamities usually cause rates to go down, as the U.S. market is seen as a favorable environment for investors.

World Politics
When other key countries are in crisis, U.S. bonds are viewed as a safe harbor for foreign investors and rates go down. When tensions abate, rates increase.

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