What Are Mortgage Rates and Why They Matter

They come up, even foremost, when you search about mortgages. Understandably, mortgage rates are almost synonymous with mortgage costs, something loan shoppers ought to keep in mind. Let’s get to know these mortgage rates better, what they are and what moves them.

Mortgage Rates and Their Types

A mortgage interest rate is what the lender charges on your home loan. In calculating your mortgage rate, lenders will factor in your qualifications and the prevailing market forces.

The mortgage interest rate can remain fixed through the life of the loan or adjusts as the loan term progresses.

1. Fixed-rate mortgages are those with constant interest rates. With the interest rate fixed, you’ll make the same monthly payments from beginning to end.

The 15-year and 30-year fixed-rate mortgages move along with the 10-year and 30-year Treasury bonds, respectively. The implication being that when the yield on these bonds rises so do the mortgage rates. And when the bond yield falls, the mortgage rates will follow.

There are various reasons why the bond yield rises or falls. In cases when the economy is not doing well, you’ll see the bond yield dropping. With mortgage rates lower, more borrowers are encouraged to refinance or buy a home.

2. Adjustable-rate mortgages are loans with variable interest rates. The rates on these loans start out really low and so do their monthly payments. The rates will adjust when the fixed-rate expires regularly or at least once a year.

The variable-rate loans are directly affected by the fed funds rate, which is an important, benchmark rate. The fed funds rate is used by banks to price their short-term loans as well as the prime rate. Whenever the Federal Reserve raises its target range for its benchmark rate, short-term rates like ARMs will also increase.

To keep rate increases in check, ARMs have caps: (a) initial cap which sets forth the limit of any rate increase after the expiration of the fixed-rate period, (b) subsequent adjustment cap will limit the increase for the subsequent adjustment periods, and (c) lifetime adjustment cap that puts a limit to how much the rate can rise overall or throughout the loan’s life.

Mortgage Rate vs APR

The mortgage interest rate is the finance charge you’ll pay every year when you borrow the money for your mortgage. Although it is a yearly charge, it is divided into 12 months to be reflected on your monthly payment.

The annual percentage rate or APR is your mortgage rate plus other costs and fees that make up your mortgage. Between the two, the APR provides a broader look at your mortgage cost and is thus higher than the mortgage rate.

You can take into account both APRs and rates to gauge the cost of a mortgage. Just note that the APR on a variable-rate mortgage does not reflect the maximum interest rate as it is bound to adjust unlike the fixed interest rate.

Will You Get a Lower Rate? Look at These Factors

Mortgage rates are a product of external and internal aka personal factors. The external factors being the Federal Reserve’s monetary policy including the benchmark rate, the Treasury yields, economic outlook/growth, inflation, housing market, and geopolitical events that stir the markets. From your end, your credit score and choices of a home and loan can influence where your rate is going or will you get a lower rate, essentially.

Presenting the factors that affect your ability to get a good rate. These are:

The Score

Your credit score is very important in determining your mortgage. It is the sum of what’s on your credit report. Generally speaking, an individual can have various credit scores including educational credit scores. Lenders will pull FICO scores that differ by the credit reporting agency – Experian, TransUnion and Equifax.

FICO scores are generally computed as follows:

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • Credit mix – 10%
  • New credit – 10%

What’s important is for the lender to establish that you have a track record of paying your debts and that you can be relied on with your mortgage debt. If the lender sees that then you might score a lower rate.

The Home

Mortgage rates vary per state so where your property is located plays a part. It would also matter how much you are borrowing relative to the purchase price. If you are financing more than 80% of the purchase price, your interest rate will be higher compared with financing just 70%.

This is where the downpayment comes in. A bigger downpayment means a higher investment on the part of the borrower and lowers the chance of default on his/her loan. This translates to a lower risk for the lender and thus a lower interest rate on the loan.

The Loan

The 30-year fixed mortgage rates are the highest compared to the 15-year and 5-year hybrid adjustable-rate mortgage per Freddie Mac’s Primary Mortgage Market Survey®. Longer-term mortgages tend to have higher rates because there’s a higher likelihood that the borrower will default on the loan given the long time period.

But the catch with shorter-term rates like adjustable-rate mortgages is that these rates adjust and are prone to fluctuations in the market.

Rates can also differ among the various mortgage products. There are numerous loan programs such as conventional, conforming, jumbo, and government loans such as FHA, USDA, and VA, and each type is priced differently.

 

How Are Mortgage Rates Today?

Mortgage rates are volatile creatures, you’ll never know where they are heading next and how high or low they’ll get. This has been highlighted the past few months after the Election Day. Given today’s rate climate, you might have doubts about refinancing or buying a home. But to be fair, today’s  rates remain historically low if you look back to 10 years ago.

orortgage Rates As of Today

As of July 11, 30-year fixed mortgage rates exhibited a +13 increase to 4.25% from yesterday’s 4.12%. Per Freddie Mac’s survey for the week ended July 6, the 30-year mortgage rate averaged 3.96%, up from 3.88% of the preceding week.

While the 30-year FRMs have been moving up again, 15-year fixed mortgage kept at 3.37% day-over-day and 5-year hybrid adjustable-rate mortgage slightly increased to 3.22% from 3.20% on July 11. As surveyed last week, both the 15-year FRM and 5-year hybrid ARM moved slightly higher to 3.22% and 3.21%, respectively.

Freddie Mac’s Chief Economist Sean Becketti noted of the sharp turn of global interest rates, the 10-year Treasury yield included. When the Treasury yield increases, longer-term mortgage rates like 30-year mortgages also rise as shown in the survey.

Mortgage Rates of Yesteryears

It was only in late June that rates reached their lowest record of 3.88% for 2017. They opened the year pretty steeply by 2016 standards at 4.20% and declined to 3.97% in mid-April. Still, they flipped-flopped between lower 4%s and high 3%s.

You may have heard of experts and analysts in news reports saying that mortgage rates at this level are pretty much low by historical standards. And there’s truth to it.

Around this time 10 years ago,  rates were in the mid-6% level. Historical data from Trading Economics and Freddie Mac showed that by the end of 2008, mortgage rates were upwards 4.5%. It was in the middle of 2012 that they slowed to 3.5% and closed the year with 3.33%.

From then on, rates were at 3% and 4% levels, almost alternatively. But in 2016, they were pretty much in the 3% level, the lowest of which was in July and August at 3.44%; rates sharply rose to 4.20% in December.

The Future of Mortgage Rates

Experts and investors keep track of the movement of mortgage rates and do forecasts but that’s all there is. Their movement can’t be totally predicted but mechanisms such as locking ensure you are protected should they go higher than expected while you process your application.