Interest rates are all determined by risk. Lenders want less risky investments, so they are willing to favor the buyer who has a less risky profile. The following are 4 key factors that determine the risk profile of a borrower

• Occupancy of the home
• Type of Property
• Down Payment
• Credit Score

Now, you may hear people say that an Adjustable Rate Mortgage has a lower interest rate and that the period of time you lock in rates provides a lower interest rate. This is all true; however, the borrower risk profile is the primary vehicle that will determine the interest rate a consumer receives. Let’s discuss what these 4 factors reveal:

Occupancy of the home – This is an important factor because purchasing a primary residence will deliver a better interest rate than someone purchasing an investment property. Think about it, if you have a primary residence and an investment property, which one are you most likely to pay if you are struggling? The primary of course, which makes it less risky, hence a better interest rate.

Type of Property – A single family home usually hold its value better than a condo or co-op so lenders will offer better interest rates for the purchase of a single family home. In addition, you may walk away from a condo, but not from a single family home, which makes single family homes less risky for a lender.

In part two, we will discuss the fine points of the Down Payment and how your personal investment can give you a better opportunity on lower interest rates.

For the first time in six months responses to Fannie Mae’s Monthly National Housing Survey were positive regarding home prices. Respondents surveyed in November expect home prices to increase by 0.2 percent over the next year compared to October’s expectation of a 0.3 percent decline.

Twenty two percent of respondents expect home prices to appreciate over the next year compared to 19 percent who had such expectations in October. Another 19 percent expect prices to decline, down from 23 percent last month, while 53 percent expect prices to remain the same, a 2 point drop.

Respondents, a mixture of homeowners both with and without mortgages and renters, also expect rents to increase, although their estimates of the amount have lessened. Forty-one percent expect prices to rise over the next year and six percent think they will decline, however the average expectation has come down 0.1 percent to a 3.2 percent increase.

Attitudes toward buying and selling a home in the current market have changed little over the last year. Sixty-eight percent of those questioned view this as a good time to buy a home, a figure that has varied by only 3 percentage points since last November, while 10 percent say it is a good time to sell, virtually the same as the responses in each of the previous twelve surveys. The share of Americans who say they would buy their next home fell 3 percentage points to 63 percent while 32 percent say they would rent.

While attitudes toward housing are looking up a bit, Americans continue to have a negative view of the national economy and of their own finances. Seventy-five percent say the economy is on the wrong track (down from 77 percent in October) while 16 percent think it is on the right track, unchanged from the all-time low October number. As in October, 18 percent of respondents expect their own financial situation to worsen over the next 12 months while 66 percent say their income has not changed in the last year, the highest number ever to report this. Improving income was reported by 16 percent compared to 18 percent last month while 18 percent say they have had a significant decline in income over the last year. At the same time, 37 percent report that their expenses have increased significantly and 54 percent report no change.

“After two months of gains the index measuring builder confidence has reached its highest level in 17 months according to data released today by the National Association of Home Builders (NAHB) and Wells Fargo. The Housing Market Index (HMI) for November was up three points to 20. The index also rose three points in October.

NAHB and Wells Fargo have conducted the survey for over 20 years. It measures NAHB members’ confidence in the new home market through their responses to three questions. The first measures builder perceptions of current single-family sales as “good”, “fair”, or “poor” and, using the same scale, their expectations of sales over the next three months. The third question asks builders to rate the traffic of prospective buyers as “high to very high”, “average” or “low to very low”. Responses to all three questions are used to construct the composite index. An index total over 50 indicates the more builders have a positive view of market conditions than have a negative view.

The index measuring current sales conditions also rose three points to 20, while the index gauging future sales expectations increased two points to 25 and the component measuring traffic was up one point to 15. All three components are at the highest levels since the spring of 2010.

On a regional basis the Northeast registered a three-point gain to 17; the Midwest was up 8 points to 23, and the South improved 2 points to 21. The West, which had increased substantially in October, plunged six points to 15 in November.

“While this second solid monthly gain on the builder confidence scale is encouraging, the overall measure remains quite low due to the many challenges that home building continues to face with regard to the high number of foreclosures, the difficulties of obtaining construction financing and accurate appraisals, and the restrictive lending environment that is discouraging potential buyers,” said Bob Nielsen, NAHB Chairman. ”These problems must be addressed so that housing can contribute to economic and job growth the way it has in the past.”

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The Federal Open Market Committee, the Fed’s decision-making body, voted 9-1 to leave their easy-credit policies unchanged for the first time since August, citing an economy that’s “strengthened somewhat in the third quarter.”

Pointing to continued division within the Fed, Chicago Fed President Charles Evans dissented because he wanted to see additional policy accommodation. It was the first dissent from an official wanting to take more action to ease credit since late 2007.

At the end of their two-day meeting, Fed officials said the strengthening recovery since the summer reflected “in part a reversal of the temporary factors that had weighed on growth earlier in the year.”

However, they said indicators continue to point to weakness in the jobs market. At the same time, the central bank signaled little concern over inflation, which it sees slowing after a commodity-driven price spike in the first half of the year. Long-term inflation expectations have “remained stable,” the central bank said.

Such a scenario would normally prompt the Fed to act. However, the central bank has already pushed interest rates to very low levels, and many Fed officials, including Chairman Ben Bernanke, believe it is Congress and the White House that should do more to aid the economy. Also, the economy seems to have picked up a little after hitting a wall last summer, giving the Fed time to assess the impact of steps taken in August and September to boost growth.

The FOMC reiterated that U.S. short-term interest rates are likely to remain close to zero at least through mid-2013, a move that was first announced August 9. The central bank will also continue to boost its share of long-term Treasurys, a step unveiled Sep. 21, in an effort to push down long-term interest rates. Both moves are aimed at boosting a persistently weak economy by getting consumers and companies to borrow and spend more.

“Household spending has increased at a somewhat faster pace in recent months,” Fed officials said.

The economy appears to have made some employment gains in recent weeks, but they’re too small to bring down the unemployment rate, which is still hovering above 9.0%. The nonfarm private sector added 110,000 jobs on a seasonally adjusted basis in October after adding 116,000 in September, data showed Wednesday. The report indicates moderate job growth ahead of the government’s official tally of U.S. employment which will be released Friday.

However, Fed officials cautioned that their economic outlook is subject to “significant downside risks.”

Despite some improvement over the past month, growth remains slow more than two years after the recession ended and is threatened by ongoing financial troubles in Europe. The rapid downfall this week of securities firm MF Global Holdings Ltd., which made bad bets on European debt, served as a reminder of how interconnected and fragile the global financial system is.

In the days leading up to the Fed meeting, some senior bank officials have been arguing in favor of further steps to spur growth. Vice Chairwoman Janet Yellen, New York Fed President William Dudley and Governor Daniel Tarullo all warned that the economy is at risk and that the Fed may need to purchase more securities-a step known to some as quantitative easing-to push down long-term rates.

However, others worry the Fed could do more harm than good with its actions. Pumping more money into the financial system may only bring more inflation without helping the jobs market, according to three officials who dissented at the central bank’s previous two meetings, but not this time: Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota.

The Federal Reserve’s policy-making committee is increasingly divided between advocates for stronger steps to bolster the economy and dissenters who see little benefit and considerable risk in such efforts, according to minutes of the committee’s most recent meeting.

The Federal Open Market Committee voted at the end of a two-day meeting in September to begin an effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.

The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.

The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.

“It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear,” the minutes said.

The Fed noted that labor market conditions in particular had been disappointing, with companies adding fewer workers than expected. It also noted that both consumers and businesses remained surprisingly pessimistic.

In response to evidence that the economy is growing slowly, at best, the Fed announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities.

The Fed’s chairman, Ben S. Bernanke, has said since the decision was announced that the central bank is willing to act again if necessary, but also that there would be a high bar. In particular, he has said that the Fed was most likely to act if the pace of inflation abated to the point where there was a risk that prices and wages might begin to decline. Such a trend, known as deflation, can cause buyers to delay purchases, derailing the economy.

The minutes, which are normally released three weeks after a policy decision, made clear that the Fed had not changed its view that the pace of inflation was likely to remain at roughly 2 percent a year, the rate that the Fed considers most healthy.

“Participants generally judged that there was relatively little risk of deflation,” the minutes said.

That suggests that the central bank is unlikely to seriously consider another round of asset purchases, the most powerful arrow left in its quiver.

The minutes do note that “a number of participants” said that they regarded asset purchases as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy.

The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.

There are thousands of homeowners who have either demonstrated the ability to make their current mortgage payment on time, but don’t have sufficient equity or income to meet underwriting standards, or those who meet the income or equity standards , but have blemished credit histories.  The government could easily create programs to assist these homeowners, while giving banks the confidence to lend.  This would free up millions of dollars of disposable income, while substantially reducing the number of short-sales on the market, which is vital to stabilizing the housing market.

While these things don’t promote a stable economic environment, they do cause interest rates to plummet. You see, interest rates are tied to the US government bond market, which is considered an investment safe haven in times of economic turbulence. Investor’s money flocks to US treasuries when there is market uncertainty, which drives the prices of treasuries higher, and mortgage interest rates lower (that’s a paradox to explain in another blog post). This drives mortgage rates to new lows, and gives homeowners the opportunity to save a significant amount of money by refinancing their mortgage, or purchase a home while locking in at a historically low rate.

So, the next time you see a stock market collapse, a country defaulting on their debt, or citizens overthrowing an oppressive government, pick up the phone and call your local mortgage banker. It may be time for you to refinance your mortgage, or purchase a new home.