Mortgage Interest Rates
Mortgage interest rates play a crucial role in determining the overall cost of your home loan and monthly payments. Understanding how these rates work and what factors influence them can help you make informed decisions when applying for a mortgage.
What is a mortgage interest rate?
A home mortgage interest rate is the percentage of a home loan amount (principal) charged by a lender for the use of its money. Instead of paying a mortgage lender the entire sum all at once, borrowers pay interest as part of their monthly payment.
Types of mortgage interest rates
Fixed-rate mortgage
With a fixed-rate mortgage the interest will not change over the life of the loan, unless you refinance.
Adjustable-rate mortgage (ARM)
With an adjustable-rate mortgage (ARM) the interest rate is fixed initially, but after that initial term it may go up or down, depending on market conditions.
What is an annual percentage rate (APR)?
Annual percentage rates (APRs) are not the same as mortgage home interest rates. An APR is the annual total cost of a home loan to a borrower expressed as a percentage. It starts with the mortgage interest rate, but also includes origination fees, loan discounts, transaction charges, and any premiums for credit-guarantee insurance.
The APR is usually higher than the mortgage interest rate. Always ask for the APR. If you are comparing home loans, be sure you are comparing APRs to get a true picture of each loan’s cost.
How are mortgage interest rates set?
Home loan rates are set by the interaction of a complex set of market conditions. These include inflation, economic growth, the Federal Reserve’s monetary policy, the housing market, mortgage-backed securities (MBSs), and the 10-Year Treasury Bond yield. There’s a common perception that the Federal Reserve sets mortgage rates, but the Fed’s policy is only one of the factors influencing rates.
What factors affect mortgage interest rates today?
Credit score
Your credit score is a summary of the risk you present to a lender. A high score helps obtain a lower rate — because you’re a lower financial risk.
Down payment
A higher down payment means a lower loan amount, reducing the overall risk to the lender.
Loan term
This is the length of time to repay the loan. Common fixed-rate loan terms include 10-, 20-, and 30-year loan options. The shorter the term, the lower the rate — and the less you’ll pay in interest.
4 ways to lower your mortgage interest rate
-
A larger down payment reduces the lender’s risk, which can result in a lower interest rate.
- Putting down at least 20% can help you avoid private mortgage insurance (PMI), further lowering your monthly payments
- Lenders often offer better rates for higher down payments because it shows financial stability and commitment to the loan
-
Your credit score is one of the most important factors in determining your mortgage interest rate.
- Pay bills on time
- Pay down large balances
- Don’t close old paid-off accounts — this reduces your available credit
- Don’t open new credit accounts
-
- Pay down or pay off outstanding debt, including student loans, car loans, and credit card balances
- Raise your income with a second job
Remember: A newly acquired job may not be considered usable income without a history and may not assist with improving DTI ratio.
-
Work with a knowledgeable loan originator to identify your loan choices to get the loan that best fits your financial situation.
