Understanding Current Interest Rates
If you’re a first-time homebuyer, you’re likely confused by interest rates and how they affect the market. Understanding current interest rates, how they work, and how the economy influences them can help you make an informed mortgage purchasing decision. You’ll be able to make decisions such as choosing between a fixed-rate or adjustable-rate mortgage or if refinancing out of an adjustable-rate mortgage is right for you. If interest and mortgage rates seem a little overwhelming, we’ll go over how they work and why they change over time.
What Are Interest Rates?
Interest rates are essentially the fee you pay to borrow money. When it comes to mortgages, your mortgage interest rate is what it costs you every month to finance your home purchase. It’s an extra amount you’re paying to the lender in addition to the original amount you borrowed and determines how much your monthly payments will be for the loan’s lifetime. While changes in interest rates may seem minor, even slight differences can cause your monthly payments to go up or down by thousands of dollars. Also, keep in mind that since your interest rate applies to your remaining balance, your interest rate will decrease as you pay off your principal balance!
What Determines Interest Rates?
Bank’s interest rates are set by the country’s central bank, which other banks then use to determine the APR range they offer. Our central bank, the Federal Reserve, adjusts interest rates to keep our economy stable. Their goal is to encourage job creation when employment is low, keep prices stable, and make sure inflation doesn’t get out of control. For example, when unemployment is high, the Federal Reserve may lower interest rates to encourage job growth. When interest rates are low, it’s cheaper to borrow money, so companies and people are more likely to take out loans. This increased spending fuels the economy and helps create more jobs.
On the other hand, when inflation and prices are rising rapidly, the Federal Reserve will slow down the economy by raising interest rates. When it becomes more expensive to take out a loan, fewer people will borrow money, and people buy less things. When demand lowers, prices drop and stabilize.
What Factors Affect My Mortgage Interest Rate?
Many different factors determine your mortgage rate. For example, they’ll start by looking at your credit score. This indicated how likely you are to repay the loan on time and how much risk the lender takes on. The better the score, the lower your rates will be. They’ll look at your down payment as well. If someone’s financing the majority of their home purchase, it puts more of the lender’s money at risk if they don’t pay their monthly payments. The more your down payment, the lower your interest rates. Your loan amount and closing costs will factor in as well. If someone asks a lender to roll their closing costs and other fees into the loan, they’ll typically pay a higher interest rate than someone who pays the fees upfront. The mortgage type, interest type, and loan term also play a role in your mortgage rate. Short-term loans come with lower interest rates since the mortgage is getting paid off faster. Adjustable-rate mortgages have lower initial rates compared to fixed rates, but they can fluctuate with the market for the remainder of the loan.
Here’s a list of some of the factors that lenders consider:
• Loan type
• Credit score
• Loan term
• Loan amount/closing costs
• Property location
• Down payment
• Interest rate type
Changes in Mortgage Interest Rates
When the economy, stock market, and foreign markets are strong, investors require higher interest rates to make money back, causing lenders to raise their rates. Bond investment activity also impacts mortgage rates as well as the borrower’s personal financial situation. Secondary markets come into play, as mortgage lending companies like Freddie Mac and Fannie May sell mortgage loan bundles to investors. Lenders determine what rates they can set their loans to depending on the interest rates the investors are willing to pay for the mortgage-backed securities. You’ll find that mortgage rates increase when:
• Inflation is up
• Unemployment is low, and jobs increase
• The stock market is strong
• The foreign markets are strong and stable
Mortgage rates decrease when:
• Inflation slows
• Unemployment increases or jobs decrease
• The stock market fluctuates
• When there are dips of insecurities in foreign markets
How Mortgage Interest Rates Affect the Market
While mortgage rates don’t directly affect home prices, they influence the housing supply, which does play a role in home pricing. When mortgage rates rise, homeowners are less likely to list their property on the market. As a result, there is a lower supply of properties for sale, driving up demand and prices. When mortgage rates are low, homeowners are more comfortable listing their homes on the market. This increases available inventory, making it more favorable for buyers as they have more options and negotiating power.
What Is the Outlook for Mortgage Rates in 2021?
In 2020, mortgage rates kept hitting record lows, but experts are expecting them to rise this year as the economy reopens. While rates have been gradually increasing, they’re still considered very low when looking at the mortgage rate history. Right now is still a great time to lock in low rates for new homebuyers or homeowners who haven’t refinanced. Since the beginning of the year, the average mortgage rate for a 30-year fixed rate has increased around 0.4%. As economic growth and inflation rise, long-term bond rates will rise, which is a key indicator for mortgage rates. Remember, as we mentioned earlier, as inflation increases, so do mortgage rates.
How to Get a Great Mortgage Interest Rate
You’ll want to consider the factors we mentioned earlier, such as your credit score, down payment, and so on. Remember, the riskier you are in the eyes of the lender, the higher your interest rates will be. Since rates vary by lenders, you’ll want to shop around for a lender offering the best terms. Every mortgage lender has different operating costs and overhead, meaning they’ll charge different prices to make a profit. Remember to compare the full loan estimates, including closing costs, to get an accurate estimation of which lender’s prices are more affordable. You can apply for a mortgage with several lenders at once, or you can go to a mortgage broker who “shops around” for you to find the lowest rates.
We hope this blog helps give you a better understanding of current interest rates and how they work. If you want to know how much you can expect to pay for a mortgage, we offer a program that calculates your rates for you! It’s easy, it’s instant, and best of all, it’s free!