Who Sets Mortgage Interest Rates in Sacramento?

You’re ready to sell your Sacramento home, but is now a good time to get a low rate on a new loan? Mortgage interest rates fluctuate throughout the year. Whether you’re a first-time homebuyer or buying a new home is old hat — understanding how mortgage rates work will make you a more savvy buyer.

Let’s break down what the prime rate is, what informs it, and if your credit matters (spoiler: of course it does).

What is the Prime Rate?

The prime rate is sometimes called the best rate. This is basically the lowest available rate from a commercial bank. In other words, if you qualify for the best possible mortgage rate from your lender, this is the rate you’ll pay. Prime rate affects all sorts of loans, including home loans. The most commonly referenced prime rate is the one published by the Wall Street Journal — there is a good chance your lender makes decisions based on this prime rate.

What is the Federal Funds Rate?

Aside from the WSJ prime rate, the federal funds rate also helps inform what a bank will list as its prime rate. While most consumers aren’t as familiar with this rate, it is quite important. Specifically, this is the interest rate that banks offer to each other for short-term loans of their own reserves overnight. The federal funds rate is decided by The Fed, who meets eight times per year to evaluate economic conditions and decide what the rate should be. The long and short of it is this: The federal funds rate informs the prime rate, which informs what mortgage rate you will be offered.

How Does Your Credit Affect Rates?

In order to access the prime rate, or something close to it, you’ll probably need a credit score above 700. This puts you in the “good” or “excellent” credit category and generally causes lenders to identify you as low risk.

Here are the common categories used for credit score. The lower your score, the higher your mortgage interest rate will be.

  • Scores of 740 and up = higher excellent credit
  • Scores between 700 and 739 = good credit
  • Scores between 630 and 699 = fair credit
  • Sores of 629 and below = poor credit

In some cases you may be able to buy mortgage points (also called discount) using cash. Using this process, you pay more up front for your mortgage and receive a reduced interest rate in exchange. This is one way to avoid super high mortgage interest if you have the cash flow but not the best credit.

How Can You Get the Best Rate?

There are a few ways to ensure that you get the best possible mortgage interest rate on your new loan. When you’re shopping for a new mortgage, always:

  • Clean up your credit by paying down debt and paying on time whenever possible
  • Follow interest trends to see if mortgage interest rates are expected to drop soon
  • Compare offers from multiple banks, as commercial banks, credit unions, and government loans often have varying rates at the same time
  • Lock into a fixed rate loan when you find a good rate, instead of accepting an adjustable rate mortgage which could fluctuate by as much as 5 points throughout the life of your loan

If you have your eye on a new home and a great mortgage interest rate but you can’t sell your current property, we may be able to help. California Family Homebuyers purchases homes in the Sacramento area in as-is condition. We may be able to get you out of your current property in as little as one to two weeks so you can have more cash to put down on your new home. Call us today!

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