Whether you’re ready to buy a home or refinance, shopping for the lowest mortgage rate can pay off. Mortgage rates are a key factor in the cost of your home loan and a low mortgage rate could save you thousands over the life of your loan. See current mortgage rates and trends and what it takes to snag a low interest rate for your home loan.
- What are current mortgage rates?
- Will mortgage rates go down?
- How can you calculate your mortgage rate?
- How can you find the lowest interest rate?
What’s a Good Mortgage Rate?
Mortgage rates have trended up and down over the last few decades, as high as 18% in the early 1980s to the historic lows below 4% that we have today.
If you’re a well-qualified borrower with a solid credit score in the mid 700s and a good debt-to-income ratio, it would be really difficult to get a bad rate right now, says Jeremy Sopko, CEO of Nations Lending. Currently, 30-year fixed-rate loans can be as low or even below 3%. “If you can land a rate below 3.5%, you should jump on it,” Sopko says.
Will Mortgage Rates Go Down?
With the current extremely low rates, there may be nowhere to go but up. But when rates will rise is more of a question.
“There are so many unknowns that have the potential to impact rates, the pandemic and state of the U.S. economy being the biggest,” Sopko says. However, he notes, there’s very little room for rates to go any lower.
“Consumers are right at this very moment enjoying historically low rates,” says Jerry Koors, president of Merchants Mortgage, a division of Merchants Bank of Indiana. “You may never see this again in your lifetime.”
Koors anticipates rates to remain steady for the beginning half of 2021. “They may go up some, but will still be very, very attractives rates well under 4%,” he says.
How Are Mortgage Rates Determined?
Mortgage rates are determined both by external factors that are out of your control, and others that are related to your borrower profile and the type of loan. These include:
- Federal Reserve and economic activity: The Federal Reserve doesn’t actually set or control mortgage rates, Sopko says, but its actions can have an effect on where rates go. “The Fed raises and lowers short-term interest rates based on broad economic factors, but Fed rates and mortgage rates move independently of one another,” he explains. However, when demand for mortgage-backed securities (bundles of mortgages that are sold to investors) goes up, mortgage rates tend to go down, he says. In fact, to keep mortgage interest rates low throughout the coronavirus pandemic, the Federal Reserve purchased additional mortgage-backed securities.
- Your credit risk: The riskier you are in the eyes of a lender, the higher you can expect your rate to be, Sopko says. For example, having a high debt-to-income ratio, a poor credit score, and an unstable work history means you are a higher-risk borrower. Therefore, you would likely have to pay a premium to borrow money, and may even have to work with an alternative lender.
- Your down payment: How much or how little money you put toward a down payment can also impact your interest rate. “If you have less skin in the game, you’re a riskier borrower,” Sopko says. In most cases, with all other things being equal, the person putting down 3% will not get as favorable of a rate as someone putting down 20%.
- Mortgage type: You may see some minor differences between rates if you compare the different types of home loans including conventional loans, Federal Housing Administration loans, U.S. Department of Veterans Affairs loans and jumbo loans. “Jumbo loans are generally going to be a little bit higher, while the other loans are going to be in line with conventional loan rates because they are government-backed loans,” Koors says. There are also adjustable-rate mortgages that may start out at a lower fixed interest rate for a set period of time, but will change periodically.
- Length of loan: A 30-year mortgage will have a higher rate than a 15-year one because the borrowed money is going to be out there longer, posing a higher risk to the lender, Koors says.
Why Aren’t All Mortgage Rates the Same?
As you shop around, you’ll quickly realize that mortgage rates fluctuate between lenders and mortgage companies. “It’s not unlike the way the price of consumer products fluctuate between retailers,” Sopko says.
There are many factors that can impact why one lender charges a certain rate over another. The two main ones are:
- Perceived risk: One lender may calculate a borrower’s risk a bit differently than another. Since underwriting criteria can vary, each lender may weigh certain factors more or less heavily. While one might be strict about the required credit score needed for the lowest rate, another might give more leeway if the borrower has more assets. Lenders may also treat those with nontraditional income streams differently.
- Margins: Mortgage lenders want to make a profit just like any other business, while also trying to stay competitive. “Rates will vary between lenders because each lender has its own internal cost structure and its own desire for margin above what the secondary market is paying,” explains Bill Packer, executive vice president and chief operating officer of American Financial Resources.
While rates are an important point of comparison when you’re reviewing loan options, be sure to look at other costs like origination fees and mortgage insurance, so you’ll get the full picture of what it’s actually costing you to get that rate. For example, one rate quote might seem lower than another, but that lender may be factoring in paying discount points, which will drive up your closing costs.
The best way to do an apples-to-apples comparison is to obtain a loan estimate from each lender, Packer says. Then you can go through them line by line to see how each offer stacks up.
How Can You Calculate Your Mortgage Rate?
Mortgage calculators can be useful tools to help you understand how interest rates can impact the cost of your home loan. By plugging in various numbers, you can see that even slight differences in mortgage rates can have a big effect, both in terms of monthly payment and long-term cost.
- On a $200,000 mortgage, a 4% interest rate would require a $955 monthly payment and cost $343,739 over the life of the loan.
- With a 3.25% rate, the payment goes down to $870 per month, and the total cost is $313,349.
Of course, there are other factors that you should include in your calculations to figure out what your true monthly mortgage cost will be, such as property taxes, home insurance and private mortgage insurance (if applicable).
Playing with various calculators can also help you figure out how much home you can actually afford before you do interest rate research and home shopping.
Is APR the Same as Interest Rate?
Mortgage interest rate and APR are not the same. Basically APR is the “all-in” cost of a loan, Sopko says. That includes origination fees and mortgage insurance, whereas the interest rate is simply the yearly interest you’ll pay on the money borrowed.
“If your interest rate is 2.5%, that’s your rate, but if you’re going to pay points or have mortgage insurance on your loan, your APR will be higher than that 2.5%,” Koors says.
That’s why it makes sense to compare the APRs of two loans in addition to looking at the interest rates because you’ll get a more comprehensive picture of your total cost. Keep in mind that there are still other items to consider that will not be reflected in the APR, such as certain closing costs.
How Can You Find the Lowest Interest Rate?
Finding and securing the lowest interest rate for your circumstances is one of the main considerations when choosing your home loan. In order to qualify for the best rate, you want to put yourself in the best possible position from a borrower risk standpoint. You should also research lenders to find the best overall deal. Here are the three main ways to get the lowest interest rate:
Credit improvement: Even a minimal increase in credit score has the potential to move you into a higher tier or creditworthiness, which may be reflected in the interest rates you’re offered. You can make improvements by paying down existing debt, making corrections to any credit report errors that might be having a negative impact and reconciling any past delinquencies.
Save up for a bigger down payment: If you have time on your side, accumulating a good sum of cash to put down on a home can potentially help you qualify for a better rate. It can also make you a more competitive buyer if another bidder on the same home is putting down less.
Shop around: While improving your credit or putting more money down is a great path to a better rate, that’s often not possible for some borrowers, especially if they’ve found their dream home and need to act quickly, Sopko says. “The best thing you can do is to give yourself options.”
Get your documentation in order: Once you’ve found a home and are quoted a strong interest rate, you’ll have to complete your home loan application in a timely manner to lock in the rate. You’ll want to have your financial documents ready to go. Lenders usually like to see two years of job history and income, Koors says. Other documents needed typically include tax returns, pay stubs, bank statements and permission for the lender to access your credit reports.
Mortgage Rates Are In Your Favor
No matter your borrowing situation, it’s difficult to find a bad interest rate these days, Koors says. “The rates are really good, but it’s important to sit down with someone you know or trust and get some good counsel rather than trying to do it on your own,” he says.
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