Mortgage Rates 2016 and How Economy and Policies Affect Them

Mortgage rates in 2016 were influenced by the Federal Reserve's decision to raise interest rates in December 2015.

The Fed's move was a response to the strengthening US economy, which was growing at a rate of 2.4% in the fourth quarter of 2015. This growth was driven by consumer spending, which accounted for 70% of the country's economic activity.

The interest rate hike had a ripple effect on the mortgage market, causing rates to rise to around 4% by the end of 2016. This was a significant increase from the previous year, when rates averaged around 3.85%.

Lower mortgage interest rates can significantly boost your homebuying power. For example, if you can afford to spend $2,000 a month on your mortgage payment, a 4% rate can help you borrow as much as $400,000.

Your mortgage rate has a direct impact on how much house you can afford, with lower rates enabling you to borrow more money. A 7% rate, on the other hand, might only allow you to borrow around $300,000.

Lower mortgage interest rates encourage home buying by reducing the cost of borrowing, making homes more affordable and increasing demand. This often leads to higher housing prices with a larger pool of buyers.

Lower monthly mortgage payments can also give you more flexibility in your budget, allowing you to afford a more expensive house. With a lower monthly payment, you may be able to afford a more expensive house.

Adjustable-rate mortgages (ARMs) can offer a relatively low mortgage rate starting out, but interest rates on ARMs adjust over time and may eventually be much higher.

Mortgage rates are determined by a mix of factors, some of which are outside your control, while others you can influence. Your credit score, debt-to-income ratio, down payment amount, mortgage type, and loan term all play a role in determining the interest rate you'll pay.

Your credit score is a major factor, with better scores leading to better rates. A good credit score can save you thousands of dollars over the life of your loan. Conversely, a poor credit score can make it difficult to get approved for a mortgage, or result in a significantly higher interest rate.

A table of the key determining factors that you have control over is below:

Mortgage rates are determined by a complex mix of factors, but some of them are within your control. Your credit score is a major player, with FICO showing that interest rates rise as credit scores fall.

For example, if you have a credit score between 620 and 639, you can expect to pay an average interest rate of 6.575% on a 30-year fixed-rate mortgage. This is significantly higher than the national average.

The amount of your down payment also affects the rate you'll get. Putting down more can unlock a better rate, but there's a minimum of 3% required for conventional loans.

Your debt-to-income ratio, the type of mortgage you get, and the length of your term are also key factors. The better your finances, the better the rate you'll get.

Here's a breakdown of the factors you have control over:

FHA rates are typically lower than conventional rates, while ARM rates might be lower initially but can change over time. Rates also vary by lender, so comparison shopping is essential to get the best rate available.

If mortgage rates today are lower than the rate on your mortgage, you could lower your monthly payment by refinancing.

Refinancing costs money, so you'll want to make sure your monthly savings make it worthwhile.

You can refinance to take cash out of your home, which can be beneficial if you need to pay for a big home repair or upgrade.

However, if it means taking on a higher interest rate, it might not be worth it.

Mortgage interest rates can change due to various factors. The Federal Reserve plays a significant role in influencing mortgage rates by setting the federal funds target rate and buying or selling government securities like Treasury bonds.

The Fed's actions can indirectly affect the interest rates banks charge for mortgages, making borrowing more expensive with higher rates or cheaper with lower rates. This is a crucial factor to consider when understanding why mortgage rates change.

Inflation is another key factor that affects mortgage rates. As the economy grows and inflation rises, mortgage rates tend to increase. This is because lenders want to manage demand and protect their investments.

Economic growth can also lead to higher mortgage rates. Lenders raise rates to manage demand as businesses and consumers borrow more during growth periods. Additionally, investors may shift resources from bonds to stocks, raising bond yields and mortgage rates.

The housing market influences mortgage rates through supply and demand, credit availability, and refinancing activity. This is a complex interplay of factors that can impact mortgage rates.

Bond market conditions also impact mortgage rates. Fixed-rate mortgage rates are historically linked to the bond market since mortgage lenders and Treasury bonds compete for investors in the secondary market. When the economy is doing well, demand for bonds decreases, making mortgages more desirable and pushing up rates.

Here are the key factors that affect mortgage rates:

You can optimize your mortgage rate results by locking in the best rate, which ensures you keep your current rate and avoid increases before you close on your loan. Rate locks typically last between 30 and 90 days, though you may have the option to extend it if you need to (for a fee).

To improve your chances of getting the lowest 15-year mortgage rate, focus on cleaning up errors on your credit report, paying debts down or off, making all debt payments on time, keeping credit card balances below 30%, and saving for a bigger down payment. These improvements can help lower your mortgage rate and save you money in the long run.

Consider all your loan options, including government-backed mortgages, conventional loans, ARMs, and fixed-rate mortgages. Government-backed mortgages often have lower rates than conventional loans, but may come with other fees. ARMs sometimes start out with lower rates than fixed-rate mortgages, which can be beneficial if you want to keep your monthly payment low and you plan to refinance or sell before the rate starts adjusting in a few years.

You can shop around between lenders for the lowest interest rate, and use multiple mortgage offers as leverage to negotiate for a lower rate and/or fees.

To get the best results, it's essential to understand how to navigate rate locks. Your loan officer can help you figure out when a good time to lock in your rate might be.

Locking in your rate can give you peace of mind, but it's not a one-size-fits-all solution. Rate locks typically last between 30 and 90 days, though you may have the option to extend it if you need to (for a fee).

If you lock in your rate and rates decrease afterwards, you might feel like you're missing out. However, if your lender offers a float down option, you may be able to take advantage of the lower rate.

When you're shopping for a mortgage, it's easy to get caught up in finding the best rate, but there's more to consider than just the interest rate.

Government-backed mortgages often have lower rates than conventional loans. This is because they're insured by the government, which reduces the lender's risk and allows them to offer lower rates.

Some government-backed mortgages, like FHA loans, come with fees that might offset the benefit of a lower rate. These fees include upfront and annual mortgage insurance premiums.

ARMs, or adjustable-rate mortgages, sometimes start out with lower rates than fixed-rate mortgages. This can be beneficial if you want to keep your monthly payment low and you plan to refinance or sell before the rate starts adjusting.

Here are some common loan options and their characteristics:

Ultimately, the best loan for you will depend on your individual financial situation and goals. Take the time to research and compare different loan options to find the one that works best for you.