A mortgage rate is the amount of interest that lenders charge on home loans. The interest rate is determined by multiple factors, some of which are out of your control.
For example, the best mortgage rates go to borrowers with high credit scores. And even a small difference in the rate you pay can add up over the life of your loan.
Real Estate Financing Options
As interest rates rise, homebuyers can expect to pay more in mortgage payments each month. That can reduce the number of homes they can afford to buy.
Mortgage rates are influenced by the federal funds rate, competition and your own financial situation. Money’s daily mortgage rates show what borrowers with a 700 credit score — the national average — might find available if they shop around for a loan.
Investment property mortgages typically have higher rates than owner-occupied mortgages. That’s because lenders tack on an extra 0.25 percent or so when extending the mortgage to an investor-occupied building. In addition, some lenders offer temporary buydowns where the interest rate is lowered for the first year or two. This can reduce monthly payments but may not be a good long-term strategy.
Fixed Rate Mortgages
A conventional fixed-rate mortgage has a set interest rate and payment schedule. This type of mortgage has a term that usually lasts 30 years, with monthly principal and interest payments that stay the same over the entire loan term.
Each lender sets rates based on a formula that can include the current federal funds rate, competition and even staffing levels. Mortgage rates can also fluctuate depending on the demand for homes, global economic factors and the supply of money to finance them.
Changing mortgage rates can have an impact on the buying power of prospective homebuyers. Choosing a shorter mortgage term, for example, can increase monthly payments but cut the amount of interest paid over the life of the loan. The monthly payment can also be affected by property taxes, homeowners’ insurance premiums and homeowner association fees.
Adjustable Rate Mortgages
An adjustable rate mortgage (ARM) may seem like a great deal, especially with an attractive low-interest introductory period. However, rates can jump quickly and borrowers can find themselves paying much more than they expected. Also, some ARMs feature „payment-option“ payment plans that include interest-only payments or minimum (or limited) payments that don’t pay all of the interest due, which can result in negative amortization and end up costing you more in the long run.
Still, ARMs are popular among homebuyers who plan to sell their house before the variable-rate portion of the loan kicks in, or if they can refinance into a fixed-rate mortgage. But these loans can also be risky to those who intend to stay in their homes for a long time or those who cannot afford to refinance when rates are high.
Jumbo Mortgages
When you’re buying a high-value home, you’ll likely need a jumbo mortgage. These loans exceed loan limits set by Fannie Mae and Freddie Mac, the government-sponsored agencies that purchase most conventional mortgages.
Non-conforming mortgages aren’t sold to Fannie and Freddie, which means lenders take on extra risk when offering these mortgages. To mitigate this, lenders require higher credit scores and larger down payments from borrowers with jumbo mortgages.
However, your interest rate will vary depending on your specific financial situation. Factors like your credit score, debt-to-income ratio and cash assets can have a greater impact on your rate than the amount of money you borrow. That’s why it’s important to meet with mortgage professionals and understand your financing options. This way you can make the best decision for your needs.
Home Equity Lines of Credit
Home equity lines of credit give borrowers access to a fixed amount of money based on their home’s appraised value. Similar to a mortgage, lenders vet applicants by looking at their debt-to-income ratio and credit scores.
HELOCs typically have a 10-year draw period and a 20-year repayment term. During the draw period, homeowners can borrow up to the line’s limit and pay only interest. Once the repayment term begins, borrowers must make monthly principal and interest payments for the remaining balance.
Many HELOC lenders charge closing costs and fees, although some, like PenFed, waive them on loans that meet certain requirements. These include professional appraisals and filing official documents with the state. HELOCs also have variable interest rates tied to indexes and add a margin on top of that rate.