If you're looking to buy a home soon, mortgage rates are going to be something that you'll want to pay close attention to. It may seem insignificant, but a mortgage rate differing by only a few percentage points can ultimately make or break your home buying decision.
This post will dive into precisely what mortgage rates are, what affects mortgage rates, and how you can get the lowest mortgage rates possible (and save yourself tons of money in the long run).
Ready to take the next step in your home buying journey and learn all about mortgage rates? Let's get right into it.
What Are Mortgage Rates?
When you go to buy a house, unless you're paying it all in cash, you'll likely need to take out a mortgage. A mortgage is simply a loan from the bank that you'll need to repay over time. Typically you will put up 20% of the total price (the down payment), and the bank will provide you with the remaining 80%. So if you're buying a $1 million home, this means you'll need to go $200,000 out of pocket, and the bank will give you a mortgage loan of $800,000.
But a bank won't lend you money for free. After all, that loan amount could go towards investments yielding the bank money (plus, the bank doesn't know if you'll repay them at all). For this reason, they'll charge you an interest rate on your money. This is where mortgage rates come in. A mortgage rate is just the rate of interest charged on your mortgage. Your lender determines them, and you'll either get a fixed rate or a variable-rate mortgage.
The mortgage rate may seem inconsequential, but it can seriously impact your monthly payments and amount to tens of thousands of dollars in costs down the line. For this reason, the mortgage rate on your home loan is one of the most significant factors you should take into account when looking to buy a house.
Important Mortgage Rate Terms
Interest rates on your mortgage loan are some of the most important considerations you should keep in mind when purchasing or refinancing a house, but here are some other important home buying terms to also keep in mind:
- Collateral – On a standard loan, the collateral is something that the borrower must sign over to the lender. If the borrower fails to meet the loan terms (or can't pay at all), the lender has the right to take the collateral. In the case of mortgage lending, the collateral is typically the house itself.
- Principal and interest – Principal is the amount of money initially borrowed (for the example above, that would be $800,000). Interest is the rate that is applied to the principal (and is how lenders make money).
- Tax – As crucial as mortgage rates are for buying a house, homebuyers must be mindful of the tax that they will owe. Typically, this will vary based on the house's location and how expensive the place is.
- Insurance – Home insurance is another cost that must not be overlooked. Insurance premiums nowadays are pretty high and will undoubtedly impact the homebuying process.
What Affects the Mortgage Rate?
Despite your best efforts, some factors affect your mortgage rate that you have no control over. Here are some things concerning your home mortgage rate that you have no control over:
- The Overall Economy – When the economy is looking good, and there are prospects for further economic growth, mortgage rates tend to go up. The opposite is true when the economy is trending down and unemployment rates rise.
- Inflation – If you don't have a fixed-rate mortgage, your mortgage rate will increase if inflation is also projected to rise. This is because as inflation rises, the dollar loses its purchasing power. As a result, your mortgage lender will demand more money as compensation for this loss.
- Job Growth – Growth in the job market means that more people are likely to get jobs and also more likely to make their monthly payments. Lenders are then not afraid to charge higher interest rates to profit. Conversely, when job growth slows (like during the beginning of COVID-19), mortgage rates also tend to shrink.
- Federal Reserve Actions – Though the Federal Reserve does not have control over mortgage interest rates, they do raise or cut short-term interest rates in reaction to the economy. You can bet that when the Fed cuts interest rates, loan rates will fall as well, and vice versa.
How Can You Lower Your Mortgage Rates?
All of the factors listed above are things that are (generally speaking) out of your control. Now let's talk about some things that you have more influence over. For example, when lenders review a mortgage application, they gauge how risky a borrower you are. The more dangerous you tend to be (the less likely you are to repay the loan), the higher the interest rate.
Here are some factors lenders look at to determine the rates that will go on your mortgage loans:
- Credit score – Your credit score and credit history can tell a lot about how you are with handling money. If you have above a 740 credit score, you'll have the most extensive selection in terms of mortgage products and receive the best mortgage rates. On the other hand, if you're sitting between a 620-699 credit score, your interest rate will be higher, and it might even be tough for you to land a high-amount jumbo loan. Finally, if your credit score is below 620, your interest rate will be the furthest from the prime rate, you'll have very few options, and the government will likely need to come in and insure or guarantee your loan for you even to get one.
- Loan-to-value Ratio – When you get a mortgage, the lender will look at how much money you're requesting and the house's actual price. With a typical 80/20 setup, the loan-to-value ratio will be 80%. Any higher than this, though, and it becomes riskier for the bank, so they'll have to increase your monthly interest payment by raising the mortgage rate.
What Are Mortgage Rates Today?
If you're looking to buy a house right now, you'll want to know what current mortgage rates are like. Here's some data from Bankrate about current rates:
- Average 30 year fixed interest rate: 3.25%
- Average 15 year fixed interest rate: 2.52%
- Average ten year fixed interest rate: 2.49%
These rates are usually available to you only if you have a spotless credit history and if your home buying situation is simple. The average adjustable rate for 10 and 5 years is not shown above but will typically be a few basis points lower than the fixed rates.
The Best Lenders for Low Mortgage Rates
If you're looking at taking out a mortgage, you'll likely also want to know where to get the best rates and best terms. So it's always a good idea to shop around to make sure that you end up saving the most money you can. Here are some potential mortgage rate providers to jot down in your bullet journal and keep in mind while you make your comparisons:
- PNC Bank – As one of the largest U.S. banks, PNC offers the largest variety of mortgages and even supplies some mortgage options that require no down payment.
- AmeriSave – Also known as AmeriSave Mortgage Corp., AmeriSave offers homebuyers FHA, VA, USDA loans, and more.
- Freedom Mortgage – If you have a decent (but not great) credit score, you'll want to check out Freedom Mortgage.
- Bank of America – When going through the mortgage process, you want someone who will be with you every step of the way. Bank of America is famous for having the best face-to-face service out of all big banks.
- Quicken Loans – If you're a first-time homebuyer with at least a 620 credit score, Quicken Loans could provide you with the most flexible options and best rates.
- Rocket Mortgage – With Rocket Mortgage, you can complete most of your application online. If you DON'T want to deal with people in person, Rocket Mortgage may be the way to go as one of the best online lenders in the space.
Everything You Need to Know About Mortgage Rates
When buying a house, there are plenty of factors to keep in mind. One thing that is easy to overlook is your mortgage rate.
Your mortgage rate is one of the most important things to consider, whether you're buying a house for the first time, refinancing your loan, or even putting money down on an investment property.
Hopefully, this post has provided you with the necessary tools and information you'll need to navigate the homebuying process better. You've learned exactly what mortgage rates are, how the economy can affect mortgage rates, what you can do to lower your rates, and even received a list of some of the best lenders on the market today.
If you're in the market for a house and were confused about mortgage rates, there should be no more confusion. You can now confidently go to lenders and negotiate the best mortgage rates for yourself.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.