How Interest Rates are Determined by Banks

Person Analyzing Graphs On Screen
Did you know that Interest rates change daily and sometimes even a couple of times during a day.

The rate a bank offers your depends on:

(1) The Current SUPPLY & DEMAND for MONEY


     Economic Calendar / Ten Yr Bond / FOMC Calendar / Economy at a Glance

      Historical Rate Charts:
      Prime Rate | 6 Month LIBOR | 1 Year LIBOR | 1 Year Treasury Rate (CMT) | 12 Month Treasury Average | More Indices

(2) HOW LONG IS THE INTEREST RATE FIXED

Fixed Rate Loan vs. ARM (Adjustable Rate Mortgage)

Shorter locked periods offer lower rates. Base your decision on how long you plan to keep the mortgage. 

(3) LOAN SIZE 

(3) LOAN TO VALUE (LTV)

Total Debt secured by the property divided by a recent appraisal of the home. If your loan amount is more than 80% of the appraised value, the lender may charge you PMI (Private mortgage insurance). PMI protects the lender against a loss if a borrower defaults on the loan. To avoid PMI, you'll want to structure your 1st position loans to be not more than 80% of the appraised value. Some lenders also offer rate incentives at lower LTVs.

(4) CREDIT FICO SCORE (Improving Your Score)
A higher score will often offer a lower interest rate. A score of 720+ places an applicant in the best programs.  680-719 is next best category, followed by 620-679 and than 500-619.

(5) DEBT TO INCOME RATIO (DTI)

Total housing expense divided by gross monthly income. Determines whether you can go Full Documentation or have to submit your application with lesser documentation (Stated Income, No Ratio or No Doc).

(6) RATE LOCK PERIOD

Interest rates and points vary by the length of time needed to either process the loan or if you are buying a home, close the escrow. The longer the rate lock period, the higher the points or rate.
    Typical lock periods are 15, 21, 30, 45, 60 and 90.

(7) OWNER OCCUPIED VS. INVESTMENT PROPERTY
Non-owner occupied loans are more expensive than owner occupied.

(8) IMPOUND ACCOUNTS

Some lenders will offer a lower rate, if you establish an impound account with the lender to handle your tax and insurance payments.

(9) CASH-OUT

If you are refinancing and taking cash out, the lender may charge a higher interest rate/points than if you were just refinancing to lower the interest rate.

(10) TYPE OF STRUCTURE

Single Family Residence vs. Low Rise Condo vs. High-Rise Condo.  Residential 1-4 units vs. Commercial. Condominiums are quoted higher rates than single family homes. There are two categories of condos (low-rise=less than 4 floors high, and high-rise=more than 4 stories high.

(11) US CITIZEN OR GREEN CARD HOLDER VS. NON-PERMANENT RESIDENT
Lenders have restrictions on LTV for non-permanent residents. Factors that will make financing difficult include liens on the property, or interest held by probate, or ownership by multiple trusts.