If you're shopping for a new mortgage, one of the first things you'll consider is the interest rates offered. However, figuring out if the interest rates are being offered at competitive rates can be difficult.

Determining if a mortgage rate is "good" is a matter of not just comparing the rates a potential homeowner is offered to the current average speeds on the market. A homeowner must also compare the rates provided to those offered by other banks and lenders.

Factors That Affect National Mortgage Rates

To determine the average home loan interest rate, it's essential to understand how these interest rates are determined.

Government Bond Rates

One of the most common ways to determine what mortgage rates a bank can offer is by analysing the current rates offered by investments considered safer than real estate loans. Typically, these investments are secure government bonds with virtually no risk of default. Banks use the interest rates on these bonds as a benchmark to set mortgage rates. Since mortgages are considered slightly higher risk than government bonds, most banks will set the minimum interest rate for a mortgage a point or two higher than the government bond rate.

This means that many people and banks interested in mortgage rates pay much attention to the government bond rate. The government will set the rate for its bonds. Lower rates will encourage banks to offer lower rates, encouraging more people to take out mortgages and other loans. Essentially, the government uses this interest rate as a way to put some control on the economy.

For an individual looking to take out a new mortgage, however, monitoring news about government bonds can be an excellent way to predict what will happen with mortgage rates. Currently, the government seems poised to slowly ratchet the bond rate through the end of 2022 and into 2023 to control inflation. For people shopping for a new mortgage, interest rates have already gone up this year and will likely continue to rise throughout the year.

In fact, many mortgage lenders in Detroit, Michigan, are telling their clients to lock in interest rates now, as they fully expect interest rates will continue to climb.

Minimum Rates

Be aware that by US law, interest rates cannot be set lower than 2% permanently for a mortgage. While it may be possible to find introductory rates on adjustable-rate mortgages set lower than this level, 2% is typically considered the floor for mortgage rates.

Factors That Affect Individual Mortgage Rates

While understanding the average national interest rate for a mortgage can help determine if you're getting a good deal, it's not the only factor that can determine a mortgage rate for an individual. Several factors can determine an individual's mortgage interest rate.

Credit score - A person's credit score is usually one of the most significant factors in determining the interest rate that he or she will get on a mortgage. While it's a good idea for potential homeowners to work to get their credit score as high as possible before applying for a mortgage, it's also important to realise that a perfect credit score isn't necessary to get a good deal on a mortgage.

While higher credit scores will typically get a person a lower interest rate, Direct Financial, a leading Detroit credit union, will work with people who have less than perfect credit daily. Having a few mistakes in your credit history should not prevent you from finding a mortgage at a great rate. In many cases, their representatives have been able to suggest ways to improve a homeowner's score so that they can qualify for a better rate.

Shorter loan term - Reducing the loan term from 30 to 15 years seems less risky to a bank. Shorter loan terms mean that a bank's capital is tied up in a property for a shorter time. Because of this, many banks incentivise homeowners to choose a shorter loan term by offering them a smaller interest rate. While the monthly payment may be slightly higher due to the shorter loan term, selecting this type of mortgage also means that a person can pay off their loan in half the time.

Direct Financial offers its clients a variety of payment terms. Depending on your financial circumstances, getting a loan term as short as five years or as long as fifty years may be possible. These personalised mortgages are perfect for people who like to control their money.

Paying down points - Some loans come with the option of offering the bank a lump sum payment to "buy down" the interest rate. Often, the cost to do this can be wrapped up in the closing fees, which can, in turn, be added to the total cost of the mortgage. That means that there will be no additional funds coming out of your pocket for the loan.