Mortgage rates play a vital role in your homebuying journey, determining how much interest is charged on your loan and ultimately impacting both monthly payment costs and total loan cost.
Many factors, both market-related and personal, influence your mortgage rate. Staying current on these trends is vital in making informed decisions throughout the mortgage application process.
What is a Mortgage Rate?
Mortgage rates influence home buyers’ payments for homes. A lower mortgage rate makes the loan more cost-effective; conversely, higher ones could make qualifying or affording payments more challenging.
Interest rates fluctuate daily based on national market factors and factors beyond a borrower’s control, such as economic strength and employment levels. A stronger economy leads to an increase in mortgage demand and interest rate increases accordingly; conversely, falling unemployment levels and economic stability can cause them to lower accordingly, making mortgage payments easier for borrowers.
Mortgage borrowers also have the choice between fixed and variable mortgage rates, providing them with some predictability in budgeting easier. Variable-rate mortgages on the other hand may change over time as they are tied to an index and the lender adds their margin rate (or “margin rate”).
What is a Fixed Rate Mortgage?
Interest rates advertised by lenders fluctuate constantly based on numerous factors. These factors include demand for bonds (which impacts mortgage-backed securities’ pricing), as well as whether or not the Federal Reserve raises or lowers the federal funds rate, which in turn has an effect on how costly it is for banks to borrow money from each other. Fixed-rate home loans provide stability throughout their term. Most fixed-rate mortgages are amortizing, meaning part of each monthly payment goes toward both principal and interest charges; less common non-amortizing loans may offer lower initial monthly payments that only pay interest before converting to full balance payments later on.
Fixed-rate mortgages have the advantage of predictability over adjustable rate mortgages (ARMs), making them a more popular choice than ARMs. When selecting your home loan, it is important to take your financial situation and future plans into consideration to choose what’s right for you.
What is an Adjustable Rate Mortgage?
After an initial fixed period, mortgage interest rates can change based on market conditions. Most adjustable-rate mortgages (ARMs) feature caps to restrict how much the interest rate and monthly payment can increase during each adjustment period and over its lifecycle.
Mortgage rates can vary due to several factors, including bond demand and Federal Reserve actions in raising or cutting rates. Most homebuyers opt for fixed-rate mortgages because it gives them predictability and protection from fluctuations in interest rate changes.
Borrowers who plan on being in their homes for shorter durations often opt for adjustable-rate mortgages (ARMs), which offer lower initial rates during their fixed-rate period. But be mindful that selling before starting an adjustable rate period would negate this advantage (unless refinancing). For more information about available loan products contact one of our financial advisors.
How do Mortgage Rates Work?
Mortgage rates have an enormous influence on home affordability and total interest paid over their lifetime loan term, and are subject to many different external influences, including economic conditions and Federal Reserve policy.
Personal financial circumstances also impact mortgage rates, especially their credit score and debt-to-income ratio. Selecting an ideal rate ultimately depends on long-term goals and needs.
For instance, adjustable rate mortgages (ARMs) often begin with an initial fixed interest rate for three, five or seven years before changing over time – though lenders typically set caps on how much it can rise or fall so as to protect borrowers against substantial increases in monthly payments due to future rate spikes – making fixed-rate loans an even more appealing choice than before. Watch our video on mortgage rates in action or use NerdWallet’s free quote tool to compare current mortgage rates in your area!
