Mortgage rates are staying below 7%. After inflation came in softer than expected in October, rates fell significantly. The average 30-year fixed mortgage rate is 6.78%, decreasing for the third consecutive week. “Before the most recent CPI, there hasn’t been any number that’s given us hope. It’s great news for potential homeowners to be able to afford those payments,” says Scott Haymore, head of capital markets and mortgage pricing at TD Bank.
How to Use This Rate Table
First, choose between purchase rates or refinance rates by toggling between the two choices at the top of the table.
Select “Purchase” if you’re buying a home
- Then fill in the information about your loan, including: The cost of the home, expected down payment, ZIP code, borrowers credit score, and desired loan length.
Select “Refinance” if you’re looking to change your current mortgage terms.
- Then fill in the information about your loan, including: ZIP code, current value of the home, whether or not you are interested in a cash-out refinance, the remaining loan balance, borrowers credit score, and desired loan term.
How to Read This Rate Table
Based on your inputs, the table will display the available mortgage interest rates, annual percentage rate (APR), upfront costs, and monthly payment. The mortgage rate is the cost to borrow the money, while APR also factors in financing costs and fees.
Pay close attention to upfront costs: Lenders will sometimes offer “points” on a mortgage, in which you pay a fee to buy down the rate. If you don’t want to see loans with these upfront costs, go to “More filters” at the top, and select 0 under points.
Keep in mind, all the upfront costs displayed here are separate from a down payment.
What Are Today’s Mortgage Rates?
On Sunday, December 04, 2022, according to Bankrate’s latest survey of the nation’s largest mortgage lenders, the average 30-year fixed mortgage rate is 6.540% with an APR of 6.560%. The average 15-year fixed mortgage rate is 5.900% with an APR of 5.930%. The average 5/1 adjustable-rate mortgage (ARM) rate is 5.480% with an APR of 7.500%.
Current Mortgage and Refinance Rates
|30-Year Fixed Rate||6.590%||6.610%|
|30-Year FHA Rate||5.870%||6.740%|
|30-Year VA Rate||5.980%||6.190%|
|30-Year Fixed Jumbo Rate||6.600%||6.610%|
|20-Year Fixed Rate||6.410%||6.430%|
|15-Year Fixed Rate||5.890%||5.920%|
|15-Year Fixed Jumbo Rate||5.870%||5.890%|
|5/1 ARM Rate||5.280%||7.290%|
|5/1 ARM Jumbo Rate||5.190%||7.050%|
|7/1 ARM Rate||5.790%||7.180%|
|7/1 ARM Jumbo Rate||6.030%||6.830%|
|10/1 ARM Rate||6.350%||6.870%|
|30-Year Fixed Rate||6.540%||6.560%|
|30-Year FHA Rate||5.950%||6.800%|
|30-Year VA Rate||6.010%||6.130%|
|30-Year Fixed Jumbo Rate||6.530%||6.540%|
|20-Year Fixed Rate||6.430%||6.450%|
|15-Year Fixed Rate||5.900%||5.930%|
|15-Year Fixed Jumbo Rate||5.890%||5.910%|
|5/1 ARM Rate||5.480%||7.500%|
|5/1 ARM Jumbo Rate||5.300%||7.480%|
|7/1 ARM Rate||5.860%||7.290%|
|7/1 ARM Jumbo Rate||6.060%||6.870%|
|10/1 ARM Rate||6.290%||6.960%|
Rates as of Sunday, December 04, 2022
About These Rates
These rate averages are based on weekday mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures. These averages provide borrowers a broad view of average rates that can inform borrowers when comparing lender offers. We feature both the interest rate and the annual percentage rate (APR), which includes additional lender fees, so you can get a better idea of the overall cost of the loan. The actual interest rate you can qualify for may be different from the average rates quoted in our rate table. But these rates are useful for giving you a benchmark to use when comparing loan offers by giving you a sense of how the type of mortgage and the length of the repayment term impacts your interest rate and APR.
This Week’s Mortgage Rates
Mortgage rates are constantly changing in response to the latest economic news. Keep in mind different lenders will offer different rates based on a variety of factors including your credit history. Here are the averages as of Nov. 30, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|30-year fixed||6.78%||6.81%||– 0.03|
|15-year fixed||6.00%||6.09%||– 0.09|
|5/1 adjustable rate||5.50%||5.52%||– 0.02|
Experts’ Take on Current Mortgage Rates
“We probably have seen peak mortgage rates unless there is some other major shock to the economy,” Cris deRitis, deputy chief economist at Moody’s Analytics, told us.
Mortgage rates are roughly twice what they were a year ago, pushed by persistently high inflation. That high inflation has prompted the Federal Reserve to raise its interest rates, an attempt to reduce prices by making it more expensive to borrow money and more appealing to keep money in savings, suppressing demand for goods and services.
The Consumer Price Index showed prices up 7.7% year-over-year in October, a positive sign that inflation is coming down after months above 8%. In November, the Fed announced another hefty rate hike. While the Fed’s interest rate doesn’t directly determine mortgage rates, they both respond to inflation.
“Mortgage rates could pull back next year,” says Odeta Kushi, deputy chief economist at First American Financial Corporation. “But when we look at the coming months, the outlook for mortgage rates will really depend on incoming economic data and whether that data points to inflation cooling or staying hot.”
This year’s surge in mortgage rates has made it significantly harder for homebuyers to afford a home, as monthly payments on the same loan amount are now about 60% to 90% higher than they were a year ago. “For homebuyers, it’s making a really dramatic one-two punch to the affordability of home ownership,” says Jeff Tucker, a senior economist at Zillow.
While mortgage rates have dipped a bit, they still aren’t dramatically lower. That means it’s still difficult for for many buyers, particularly those look for their first home, to afford a monthly payment. Fewer buyers are willing to jump into the housing market, driving demand down.
If rates drop more into early next year, more people will re-enter the market and competition will increase. “If we see interest rates dropping in the spring and more demand comes out, buyers have an opportunity right now where it might not be the interest rate but it’s an incredible opportunity to get out of the multiple bidding situation,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home loans.
Experts’ Advice for Homebuyers as Mortgage Rates Rise
Jodi Hall, president of Nationwide Mortgage Bankers
Don’t try to time the market, Hall says. “You can’t play the game that you’re betting on the interest rates dropping before you lock, or you’re locking to prevent what might be tomorrow.”
Mitria Wilson-Spotser, director of housing policy for the Consumer Federation of America
Keep an eye on that monthly payment, Wilson-Spotser says. “When interest rates go up, that means you can afford less home. You have to rethink what you can afford, what is a comfortable monthly payment for you.”
Melissa Cohn, regional vice president at William Raveis Mortgage
Consider an adjustable-rate loan, but don’t plan to keep it, Cohn says. “Follow where rates are and when interest rates come back down take advantage of the opportunity and refinance into a fixed rate.”
Ralph McLaughlin, chief economist at Kukun
Think about your home purchase like a long-term investment, McLaughlin says. “It has shown to be a fairly resilient, fairly stable, long term investment, especially compared to inflation.”
Tendayi Kapfidze, chief economist at U.S. Bank
Remember that buying a home isn’t just a financial choice, Kapfidze says. “If you are thinking about buying a house, make a lifestyle decision.”
George Ratiu, senior economist and manager of economic research at Realtor.com
Keep an eye on your particular market, Ratiu says. “Buyers in some areas may see more purchasing power, so it’s important to track your market very closely.”
Closing the Gap
There are some notable discrepancies within the housing market that disproportionately affect Hispanic homebuyers. Latinos were 60% more likely to be denied home loans in 2020 compared to non-Latinos, according to a report by the non-profit advocacy group the National Association of Hispanic Real Estate Professionals.
This means securing a loan for a home purchase may be particularly difficult for Hispanic borrowers. Lenders will consider whether you are an eligible borrower, but you can turn the tables and evaluate if they are the best lender for you. The best way to gain leverage is by shopping around and comparing rates and fees with multiple lenders to be sure you’re getting the best deal and a fair offer.
Historical Mortgage Rates
This chart, which uses data from a survey by Freddie Mac that differs slightly but generally tracks with the Bankrate survey used by NextAdvisor, offers a glimpse at how today’s rates compare with the past two decades.
Why It’s Important to Shop for Multiple Quotes
When you’re getting a mortgage, it’s important to compare offers from a variety of lenders. Every lender will evaluate your financial situation differently. So getting multiple quotes will allow you to choose the offer with the best rate and fees. The rate difference between the highest and lowest rates lenders offer you could be as high as 0.75%, according to a report by the fintech startup Haus.
However, the interest rate isn’t the only factor you need to consider when comparing mortgage lenders. The fees each lender charges can vary just as much as the interest rate. So the offer with the lowest rate may not be the best deal if you’re paying excessive upfront fees. To compare rates and fees, take a look at the Loan Estimate form that lenders are required to provide within three business days of receiving your application. The Loan Estimate is a standardized form, which makes it easy to compare quotes.
You can visit NextAdvisor’s comprehensive list of mortgage lender reviews here.
The Impact a Good Mortgage Rate Can Have
Your mortgage rate is the interest you pay on your remaining loan balance. It’s expressed as a percentage, and if it’s fixed, it will never change. Adjustable mortgage rates are fixed for a limited amount of time, perhaps 3-10 years, and then typically reset every year after the introductory period.
The longer your mortgage’s repayment period, the more interest you’ll pay overall. Here’s what you’d pay in interest for a $300,000 30-year fixed rate mortgage at 4.5% and 5.5%, according to NextAdvisor’s mortgage calculator.
|Loan Term||Loan Amount||Interest Rate||Monthly Payment||Total Interest Paid|
Home loan comparison calculator
Compare your payment options side-by-side to see which is right for you and your financial situation.
Find the mortgage that’s best for you by comparing the cost of multiple loans over time.
What Are the Mortgage Rate Trends for 2022?
Generally, experts expect rates will rise throughout 2022, although with plenty of ups and downs along the way. Rates have already risen faster than many experts anticipated. “Other than a brief eight-week span in late 2018, mortgage rates have been below the 5% mark since 2011,” Greg McBride, chief financial analyst at Bankrate, told us. “We’ve never seen a run-up in mortgage rates that has been this big, this fast. There have been bigger moves in mortgage rates in the past, but they took significantly longer to unfold.”
Rates have risen rapidly as the economy adjusts to changes in the wake of the pandemic and responds to the highest inflation in 40 years. With interest rates higher than they’ve been in a decade, there are fewer people who can save money by refinancing to a lower rate. The number of refinances dropped in the first quarter of 2022 as rates rose, according to a report from the real estate data firm ATTOM. “The drop-off in Q1 refinancing activity is no surprise with mortgage rates rising as rapidly as they have,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “But many forecasts expected purchase loans to remain strong in 2022, and even increase in both the number of loans originated and the dollar volume of those loans. The weakness in purchase loan activity shows just how much of an impact the combination of escalating home prices and rising interest rates have had on borrower activity this year.”
The Federal Reserve has significantly raised its benchmark short-term interest rate to address inflation and end the support provided to the economy during the pandemic, and experts say mortgage rates have risen to account for expected changes as a result. Fed Chairman Jerome Powell addressed questions about those changes’ effect on the housing market in June. “If you’re a homebuyer or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again. This will be a process whereby ideally we do our work in a way where the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”
Mortgage rates went from near-record lows to the highest in 13 years in a matter of just a few months, with weekly jumps of 10 basis points or more.
The Housing Market is in Flux
Homebuyers face a fast-changing housing market, with rising mortgage rates crushing demand for homes and causing sudden shifts in home prices. Prices spent the last few years in a dramatic surge, but that has stalled since early summer. Home prices are starting to drop on a month-to-month basis, although they’re still up from where they were a year ago.
While falling prices might be appealing to potential homebuyers, they come alongside a dramatic increase in mortgage rates that may more than wipe out any potential savings. “In my mind, this could actually help alleviate some of our affordability constraints over the long term,” Clare Losey, assistant research economist at the Texas Real Estate Research Center, told us. “Obviously, the decline in home prices is offset by higher rates, but hopefully over the long run, this will help put us in a better position.”
Federal Reserve Chairman Jerome Powell said in September that a “difficult correction” may be necessary for the housing market, which has been out of balance due to limited supply and high demand.
“The deceleration in housing prices that we’re seeing should bring housing prices in line with rents and other housing market fundamentals. That’s a good thing,” Powell said in September. “For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable pace and people can afford houses again.”
What About Cash-Out Refinances and Home Equity Loans?
Rising home prices mean homeowners have more equity — the difference between the value of your home and how much you owe on your mortgage and other outstanding loans against your house. When mortgage rates are low, as they were in much of 2020 and 2021, homeowners wanting to borrow money against that equity for big expenses took advantage of cash-out refinances, in which you take out a new mortgage to pay off your existing one and get cash to use for debt consolidation, home improvements or other uses.
Now that mortgage rates are higher than they’ve been in more than a decade, a cash-out refinance doesn’t make as much sense. You’d be giving your outstanding mortgage a higher interest rate, which could cost you more in the long run. Borrowers are increasingly turning to home equity loans and home equity lines of credit (HELOCs) if they’re interested in borrowing against their equity. These products allow you to borrow that money without jeopardizing the low rate on your existing mortgage. Home equity loans function like an installment loan, in which you borrow a lump sum and pay it back at a fixed interest rate over a period of years. HELOCs are more like a credit card, in which you get a revolving line of credit from a bank and only pay interest on what you actually borrow, usually at a variable rate.
How to Get a Mortgage
Getting a mortgage is the most important part of the homebuying process. It’s likely the largest loan you’ll ever take out. So finding the right lender and getting the best deal can save you thousands of dollars over the life of the loan.
1. Shop around and compare multiple lenders and loans
There are lots of different types of lenders. Looking at the loans and programs that banks, credit unions, and brokers offer will help you understand all of your options.
2. Apply for preapproval
3. Submit an application
Once you’re ready to start comparing loan offers, submit an application. Until you apply, the lender won’t be able to give you an official estimate of the fees and interest rate you qualify for.
To find the lowest rate and fees, you should submit applications with two or three lenders. Once you have each Loan Estimate in hand, it’s easier to compare and determine which offer is best for you.
4. Underwriting and closing
The final step to getting a mortgage loan is the underwriting and closing process. During underwriting, the lender will review everything from your credit score, credit report, and bank statements to assess if you qualify.
The closing process includes the home inspection and appraisal. The final day of closing is when you’ll sign the dotted line, take the keys to your new home, and officially have a mortgage.
Read our full How to Get a Mortgage Guide.
Types of Mortgages
Mortgages come with all sorts of different interest rates and terms. These influence how long it will take to pay off your loan and how much your monthly payments will be.
These are some of the most common types of mortgages home buyers use:
A fixed-rate mortgage has a set interest rate for the life of the loan. With this type of loan, your mortgage rate will never change. Your overall monthly payments could still fluctuate based on property taxes or other factors. But a 30-year fixed rate or 15-year fixed rate locks in how much you’ll pay in interest over the course of your loan. And if interest rates drop to below your current rate, you can refinance to a lower rate.
Two of the more popular mortgage terms for fixed-rate loans are 15- and 30-year fixed rate mortgages.
ARM (Adjustable Rate Mortgage)
An ARM is usually a 30-year term loan with an interest rate that changes over time with market averages. When the interest rate changes depends on the loan. Common ARM terms are 5/1, 7/1, and 10/1. The first number designates the first year your interest rate will change, and the second number is how frequently the interest rate resets after the first time. So a 5/1 ARM adjusts the rate after 5 years and then annually after that. Most ARMs reset annually after the initial adjustment.
There are several types of government-secured loans backed by different departments of the government, including the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA).
Qualifying for these loans is a bit different than with conventional loans. For example, USDA loans are only available for homes in an eligible rural-designated area, and VA loans are only an option if you meet the military service requirements. FHA loans typically have lower credit score requirements, but you will have to pay mortgage insurance for the life of the loan.
How to Get Mortgage Refinancing
Unlike buying a house and getting a new mortgage, you’ve got more flexibility when deciding to refinance. For starters, you don’t have to worry about finding the house. There are a few reasons to refinancing and plenty of advantages if you do it at the right time.
1. Decide why you’re refinancing
Refinancing is when you take out a new home loan to replace your old one. You might want to do that for a few reasons. If mortgage rates have dropped or your financial situation has improved significantly, you might be able to get a lower interest rate, meaning lower monthly mortgage payments. If your first loan was an FHA loan, you may have to refinance to a conventional mortgage to get rid of mortgage insurance. You may also want a cash-out refinance, in which you take out a loan for more money than you owe on the old loan to turn some of your equity into cash, maybe for home improvements or debt consolidation.
2. Shop around
Compare rates from different lenders and apply with at least three to see if you can get the best deal. It’s easier to shop around when refinancing because you don’t have to worry about the other hurdles of the homebuying process, so take advantage of that flexibility.
3. Get an appraisal
Your lender will want an appraisal to make sure they’re not giving you a loan worth more than the house is worth.
4. Pick a lender and close
Finally, choose a lender and lock in that new mortgage rate. Then comes closing, which like when you buy a home, includes signing endless amounts of paperwork.
How Do I Find the Best Mortgage Rate?
Finding the best home mortgage rate is a matter of knowing your goals and picking the right tool to get the job done. The best mortgage for you may not always be the one with the lowest interest rate. Factors like how long you keep your home loan will impact your decision.
If you plan on keeping your home loan long-term, then a fixed-rate mortgage is ideal. Mortgage rates today are very reasonable for fixed-rate 10-, 15-, or 30-year mortgages. Locking in a low rate is a smart choice. But you can get lower mortgage rates with some adjustable-rate loans too. If you plan on only keeping your home (or current mortgage) for a short period of time, then you may be able to pay less interest with an ARM.
How do I choose the best mortgage lender?
You should always compare several different lenders when shopping for a home loan. Not only will the rates and fees vary, but the quality of service as well. Regardless of what lender you end up working with, it’s important to find someone that can help your individual challenges. For example, if you’re a military veteran getting a VA loan, you’ll want to work with someone who has experience with those types of loans.
To find a trusted lender, you can look at online reviews, or even better, ask around. Your real estate agent and friends who recently purchased a home are great sources for mortgage lender recommendations. Try comparing a variety of different mortgage lenders. The best mortgage lender for you may be a bank, credit union, mortgage broker, or an online mortgage lender, depending on your situation.
How do I find personalized mortgage rates?
Finding personalized mortgage interest rates is as easy as talking to your local mortgage broker or searching online. While most factors that impact mortgage interest rates are out of your control, rates still vary from person to person. Lenders charge higher home mortgage rates to borrowers they deem riskier. So having a high credit score (740+) will get you the best interest rates. Lenders also look at how much you are borrowing compared to the home’s value; this is known as loan-to-value, or LTV.
You’ll get a better rate when the LTV is below 80%. So if your future home has a value of $200,000, you’ll get the best rates if the loan is for $160,000 or less.
When shopping around for the best rates, consider a variety of lenders, like local banks, national banks, credit unions, or online lenders. Be sure to compare interest rates, fees, and other terms of the mortgage. Also, mortgage rates are constantly changing, so getting rate quotes from multiple lenders in a short time period makes it easier to get an accurate comparison. If that’s too much legwork, you could work with a mortgage broker. Mortgage brokers don’t directly issue loans. Instead, they work with lenders to find you the best deal. But their services aren’t free. They work on commission, which is usually paid by the lender.
What is a good mortgage rate?
Rates have been on the rise since the beginning of 2022, but are still in the favorable range. If you’re considering a refinance, a good mortgage rate is considered 0.75% to 1% lower than your current rate. New homebuyers can also benefit from the latest mortgage rates as they are comparable to rates prepandemic rates.
Even if you’re getting a low interest rate, you need to pay attention to the fees. Hidden inside a good mortgage rate can be excessive fees or discount points that can offset the savings you’re getting with a low rate.
What Credit Score Do I Need to Get a Mortgage?
Every loan type has a different minimum credit score to qualify, but just because you beat that minimum doesn’t mean a lender will give you a mortgage. Conventional loans backed by Fannie Mae and Freddie Mac, government entities that buy mortgages on the secondary market, require a minimum score of 620. FHA loans require a minimum of 500, with at least 580 needed if you want to put down the lowest down payment of 3.5%. VA loans and USDA loans don’t have minimum requirements.
To actually get a loan, you probably want a credit score well above the minimum. Having a score of 700 or higher not only increases your chances of getting approved for a loan, it likely will help bring down your interest rate. If your score is in the 500s or 600s, you may have fewer options, and they could be more expensive in the long run.
What Determines Mortgage Rates?
Mortgage rates fluctuate for the same reasons home prices change – supply, demand, inflation, and even the U.S. employment rate can all impact mortgage rates. The demand for homes isn’t necessarily a sign of where mortgage rates are headed. The best indicator of whether rates will go up or down is the 10-year Treasury bond rate.
When a lender issues a mortgage, it takes that loan and packages it together with a bunch of other mortgages, creating a mortgage-backed security (MBS), which is a type of bond. These bonds are then sold to investors so the bank has money for new loans. Mortgage bonds and 10-year Treasury bonds are similar investments and compete for the same buyers, which is why the rates for both move up or down in tandem.
That’s why, in a slumping economy, when more investors want to purchase safer investments, like mortgage-backed securities and treasury bonds, rates tend to go down. The Federal Reserve has been purchasing MBS and treasury bonds, and this increased demand has led to the lowest mortgage rates on record.
When is the right time to get a mortgage?
Before you apply for a mortgage, you should have a proven reliable source of income and enough saved up to cover the down payment and closing costs. If you can save at least 20% for a down payment, you can skip paying for private mortgage insurance and qualify for better interest rates.
The best time to apply is when you’re ready. But there are other details to consider when timing your home purchase. Home sales slow down during the winter and competition heats up in the spring which can affect prices. However, general nationwide trends don’t always apply to every real estate market. Talk with local experts in your home shopping area to get a better sense of the market.
When should I lock my mortgage rate?
It’s a good idea to lock your rate as early in the mortgage application process as possible. Rates move up and down from day to day, and knowing exactly where they’ll move is impossible. A rate lock will protect you from potential interest rate increases, which could unexpectedly increase the cost of your home loan.
If you’re concerned about interest rates dropping after you lock in your rate, ask your lender for a “float down.” With this option, you get the lower of the two rates. Pay attention to the fine print, though. Typically, you can only reduce your mortgage rate if it drops by a certain percentage, and there are likely to be fees associated with this option.
Buying a Home with a Mortgage
A home might be the biggest thing you ever buy, and a mortgage is the most common way to make that massive expense possible for those who don’t have hundreds of thousands of dollars lying around. The process doesn’t have to be too difficult if you have professionals guiding you through it.
1. Decide if now is the time to buy a house
The housing market isn’t what should dictate if you’re getting a home, your life is. Start by figuring out if you’re in the right point in your life for this commitment and investment, and ensure you’re in the right financial situation to do so.
2. Make a budget
Figure out how much house you can afford and save for a down payment. There are ways to buy a house without having the usually recommended 20% up front, but the more cash you can have ready will make your bid for a home more competitive, improve the terms of the mortgage you get and save you money in the long run.
3. Assemble your team
4. Shop for a home
Working with your real estate agent, look at home listings, and find the right home (or two or three or dozen) and make an offer. You might have to offer on multiple homes, especially in a competitive market. It’s important when looking at home prices to keep in mind what your monthly mortgage payment will end up being, as that’s what really dictates what you can afford.
5. Close the deal
Once you’ve got an offer accepted, be sure to get a home inspection and appraisal. Both of those can help protect your investment in the long run. Once all the details are sorted out, it’s time to get to the closing table, sign all the paperwork and get the keys.
Mortgages: Frequently Asked Questions (FAQ)
What is a mortgage?
A mortgage is a type of secured loan that is used to purchase a home. The word “mortgage” actually has roots in Old French and Latin.. It literally means “death pledge.” Thankfully, it was never meant to be a loan you paid for until you died (although it might feel that way), but rather a commitment to pay until the pledge itself “died” (i.e., the loan was paid off).
You can also get a mortgage to replace your existing home loan, known as a refinance.
What is a mortgage rate?
A mortgage rate is the interest lenders charge on a mortgage. Mortgage rates come in two forms: fixed or variable.
Fixed rates never change for the life of your loan — and in exchange for this certainty, the rate is higher on longer loans.
Variable-rate mortgages can have lower interest rates upfront, but fluctuate over the term of your loan based on broader economic factors. How frequently a variable-rate mortgage changes is based on the loan’s terms. For example, a 5/1 ARM (adjustable-rate mortgage) would have a fixed rate for the first five years of the loan, then change every year after that.
How does a mortgage work?
A mortgage is a type of secured loan where the property – often your home – is the collateral. So you’ll never be able to take out a mortgage without having some sort of real estate attached to it. Mortgage loans are issued by banks, credit unions, and other different types of lenders.
Aside from paying the loan back, you pay for a mortgage in two ways: fees and interest. Interest is paid on your loan balance throughout the life of the loan and is built into your monthly payment. Mortgage fees are usually paid upfront and are part of the loan’s closing costs. Some fees may be charged annually or monthly, like private mortgage insurance.
Mortgages are repaid over what is known as the loan term. The most common loan term is 30 years. You can also get a mortgage with a shorter term, like 15 years. Short-term loans have higher monthly payments but lower interest rates. Mortgages with longer terms have lower monthly payments, but you’ll typically pay a higher interest rate.
What is the difference between APR and interest rate?
The interest rate is the cost of borrowing the money, and it is advertised as a percentage of the loan. APR stands for annual percentage rate, and it includes the interest rate plus other fees associated with the mortgage. So the APR will provide you with a better idea of the total cost of financing the loan. You may find lenders offering the same interest rate and monthly payments, but if one is charging higher upfront fees, then the APR will be higher.
The Federal Truth in Lending Act requires lenders to disclose the APR, but the fees can vary. When comparing APRs between lenders, ask which fees are not included for better comparison.
What are closing costs?
You’ll likely owe more when you close on the house than just the down payment on the mortgage. There are other expenses that have to be paid to make this big transaction go through. Closing costs often entail taxes and fees associated with the purchase that aren’t included in the sale price.
Expect closing costs to total around 3% to 6% of the purchase price, so you’re looking at between $8,250 and $16,500. They might include fees charged by the lender like loan origination fees, points paid to get a lower mortgage rate, fees associated with the property such as an appraisal or inspection, or prepaid costs such as property taxes or homeowners association dues.
What is the best mortgage loan type?
The best mortgage is the one that helps you meet your housing needs for as little financing costs as possible. There are a few factors to consider when it comes to getting the right mortgage.
Some experts recommend getting a 15-year mortgage because you’ll pay far less interest and be debt-free in half the time compared to a 30-year loan. With a 30-year loan, your monthly payments can be significantly lower, but you’ll pay much more in interest over the loan’s life. So it’s a tradeoff.
There are also tradeoffs in choosing a government-backed versus a conventional loan. For example, FHA mortgages can have lower credit score requirements than conventional loans. But unlike conventional loans, FHA loans require mortgage insurance even if your loan-to-value ratio drops below 80%.
If you want a set interest rate for the life of the loan and more stable monthly payments, then a fixed-rate mortgage is ideal. The interest rate on a fixed-rate mortgage never changes.
Regardless of what loan type you go with, remember, it’s not the loan you have to keep forever. Even if you stay in the same home for the rest of your life, you can refinance your mortgage to take advantage of better terms or rates.
How much can I borrow for a mortgage?
The amount of money you can borrow is affected by the property, type of loan, and your personal financial situation.
During the mortgage preapproval process, the lender will look at your overall financial profile to determine how much it will lend to you. A big factor in this process is your debt-to-income ratio (DTI). Your DTI is calculated by dividing your total monthly debt payments by your monthly income. In most cases, the maximum DTI is typically 43%. So if you make $5,000 a month, your mortgage payment and other monthly debt payments can’t exceed $2,150.
To protect its investment, a lender will typically only let you borrow a certain percentage of a property’s value. So the value of the property can also limit how much you can borrow. Most mortgage loans require a down payment of anywhere from 3% to 20%. You may be able to borrow 100% of the property’s value with certain government-backed loans, like Department of Veterans Affairs (VA) Loans or U.S. Department of Agriculture Rural Development (USDA) loans.
What is a discount point?
Discount points are fees you pay the lender upfront in exchange for a lower interest rate. Buying down the rate with discount points can save you money if you’re planning on keeping your home for a long time. But if you’re going to sell or refinance before the full loan term is up, paying more fees upfront may not make sense.
Discount points can be part of a good deal, but you need to make sure you know when they are being added to your loan. When you’re comparing mortgage offers, be sure to ask if the interest rate includes discount points.
Renting vs. buying a home
Deciding whether it makes sense to rent or buy is about more than just comparing your monthly rent to a potential mortgage payment. How long you plan on staying in that area should also factor into the decision. Buying a home requires you to pay thousands of dollars in upfront fees. If you sell the house in the next two or three years, then you may not have enough equity built up in the home to offset the fees you wouldn’t have paid if you were renting. You also need to factor in maintenance and upkeep costs with owning a home.
However, over the long term, buying a home can be a good way to increase your net worth. And when you buy, you can lock in a fixed interest rate, which means your monthly payments are less likely to increase compared to renting. Owning a home also has the added benefit of providing a stronger sense of stability for you and your family. And when you own, you have the freedom to customize your living space however you like.