When it comes to getting a mortgage loan, most people are focused on acquiring the lowest possible interest rate. Of course, the lower the interest rate, the smaller the payments will be, and the less you’ll end up paying in total across the life of a mortgage.
But before you decide on a lender and method of acquiring a property, it’s essential to understand the basics of mortgage interest rates. This article will go into what it is, what determines your rate, and whether now is an excellent time to take out a mortgage.
What a Mortgage Interest Rate Is
As a short and sweet explanation, the mortgage interest rate you get is the amount it costs every month to finance a home, condo, or other property. It’s the additional money on top of the cost of a property that allows you to borrow from a lender. So, it’s not a separate cost; it’s included in the monthly payment you make when you have a mortgage.
The interest rate is an amount that the lender provides in exchange for providing you with the money to buy a home.
Market Factors That Affect Mortgage Interest Rates
The typical mortgage interest rate will vary based on investment activity and economic factors. In addition, the secondary market has an impact. For instance, Freddie Mac and Fannie Mae bundle mortgage loans and then sell them to investors as a way to make a profit. As a result, the interest rate that investors are willing to pay has an effect on the rates lenders set on their loans.
Mortgage rates tend to decrease when the stock market has problems, foreign markets experience issues, inflation drops, and jobs decrease or unemployment increases.
On the other hand, the rates often increase when the stock market is doing well, foreign markets are stable and robust, inflation is present, jobs are growing, or unemployment is low.
Personal Factors That Impact Mortgage Rates
While the overall mortgage interest rate can rise and fall, you will also have a unique interest rate on your home purchase based on several factors. These include:
- Credit Score – Those with higher scores tend to get lower interest rates than those with lower credit scores.
- Location of the Home – Depending on the lender, the mortgage interest rate may change based on the location of your new property, be it city, county or state.
- Loan Amount and Home Price – If a loan is relatively small or large for a home, this often leads to lower interest rates. The borrowed amount will be the home price minus the down payment plus closing costs. Mortgage insurance may also be included in the loan amount.
- Down Payment – Whenever possible, putting down a larger down payment is recommended since it usually leads to a lower interest rate.
- Loan Terms – The duration of a loan also impacts your interest rate. Shorter loans may have lower rates and overall costs, but the monthly payments will be higher.
- Type of Interest Rate – Making a choice between adjustable or fixed-rate loans also impacts interest rates. With a fixed rate, the interest doesn’t change over time. Adjustable rates will change regularly depending on how the market is doing.
- Choice of Loan – There are many types of loans, such as VA (Department of Veterans Affairs), USDA (United States Department of Agriculture), FHA (Federal Housing Administration), and conventional options. The requirements to get these loans can vary, and the one you choose can have a much different rate than others.
What to Know About Mortgage Points
There is often a way to pay discount points to get a better rate than you are initially offered when it comes to mortgage interest rates (1). These points are basically a way to provide prepaid interest. One point is the same as 1% of the entire loan balance, and paying that will lower the rate you spend on the mortgage until you own the home outright.
However, keep in mind the amount it lowers the rate will be based on the current market and which lender you choose.
Many people refer to this as a way of buying down the rate for your mortgage. You’ll need to do some thinking to decide whether to use points (and how many to take advantage of). Determine how long it will take to make back the costs of the points you choose to purchase and see if it’s ideal for your situation.
For instance, ask yourself how long you plan to continue living in the home. Those who expect to stay there for a long time will often find paying for discount points is more valuable than those who might immediately sell the property to someone else.
How Mortgage Interest Rates are Shaping Up in 2022
Low mortgage interest rates were standard across 2021, but things have changed, and may continue to do so. Mortgage rates in 2021 started at 2.67% but had risen to 3.12% by the middle of December. However, according to Freddie Mac, the numbers stayed around 3% throughout the year.
The problem is new challenges are present in 2022, such as vast amounts of inflation and the Federal Reserve’s decision to increase the federal funds rate and cut down on asset purchases. All of these combined may lead to higher mortgage interest rates sooner rather than later.
Experts who focus on mortgage rates indicate that by the end of 2022, mortgage interest rates will likely range from the higher end of 3% to up to 4%. But remember it’s possible to negotiate with the lender and get a lower rate in some cases. This is important since it decreases the amount you pay over the life of the mortgage.
For those who wish to finance a home, it’s a great idea to take advantage of current mortgage rates instead of waiting until the numbers rise (2). Consider the rate you qualify for based on a steady income, loan-to-value ratio (LTV), debt-to-income ratio (DTI), and credit score.
And remember, a conventional mortgage isn’t your only option. Check into specialty mortgages, rent-to-own properties, and other options that might help you cut down costs while getting the home you desire.
(1) – BankRate.com
(2) – The Mortgage Reports
Consumer Financial Protection Bureau