American Mortgage Rates Increased to 5%, Despite Its Recent Dip
According to the reports that were released a week ago, the average American 30-year fixed mortgage rate has decreased from 4.62% to 4.57%. Despite the dip, they claimed the current mortgage rates are still historically low compared to 6% in 2005, or 8% rate last 2000.
Not the Full Story
Meanwhile, the mortgage lenders encourage the people to not be discouraged by what they hear from media, nor the news frequently reported by the press. They claim that most lenders still use the risk-based pricing method.
This method means that people with higher and better credit scores are likely to receive lower interest rates compared to those with bad records or new applicants. While most economists claimed the average mortgage rates have yet to reach the 5% threshold, the company LendingTree seems to think otherwise. According to the recent research they conducted, people with credit scores below 680 are already paying 5% threshold mortgage rates a long time ago. While people with credit scores ranging from 680-719 recently crossed the 5% mortgage rates in early 2018.
The mortgage lenders also revealed the factors behind their mortgage pricing. The first risk they take is based on the creditworthiness of the applicant. They first need to assess the borrower’s ability to repay. Not only that, but they also need to repay on time to avoid a penalty.
This assessment method is determined by their credit score, as well as the affordability ratio (or debt burden). If not, then the mortgage lenders assess their borrower’s capability through the LTV or also known as the loan to value ratio. In this case, the lender will attempt repaying their debt by repossessing or selling their homes. The lower the LTV is, the less likely the bank will lose money in the first place.
The frequency refers to the applicant’s ability to repay, while the severity refers to the LTV. This means that if a borrower has an excellent credit score with low LTV, the lower the potential loss rate is. For example, if a borrower has 800 FICO (or credit score), with 60% LTV, the bank probably won’t lose any money even in the event of a default.
Compare this to another borrower with only 600 FICO and 97% LTV. The latter’s Statistics tells the lenders the borrower is highly unlikely to repay his or her debts. If this worst-case scenario is to happen, the bank will most likely suffer from a potential loss. While the average mortgage interest rates are helpful for the borrowers to determine the trend of the market, it’s still important for potential borrowers to understand how the risk-adjusted rate works.
Tips for Future Home Buyers
Planning to buy a house in the near future? The mortgage experts and lenders give out these tips to avail of a lower mortgage rate:
- Your Credit Score matters. So before you try to apply for a home mortgage, make sure to check your credit score. As much as possible, reduce your card utilization and pay your dues on time to avoid credit penalties and inquiries. Also, make sure to clear any disputes like with inaccurate information. The more points you earn, the easier you can apply for a home loan and get a lower mortgage rate.
- Try saving at least 20% for down payment. This will help reduce the cost of your mortgage. Not only that, but it’ll also reduce your risk of gaining negative equity.
- Last but not the least, make sure to compare the prices given by different mortgage lenders as they vary significantly. Choose the best deal that works for you and enables you to save money in the process.
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