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.