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Understanding Today’s Mortgage Rates

Couple smiling as they sign mortgage documents
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What are mortgage rates?

Your mortgage rate is the amount of interest you’ll pay on your home loan annually. It’s expressed as a percentage of your loan balance. Depending on what type of mortgage you choose, home loan interest rates may stay the same or fluctuate based on market conditions.

Several factors go into determining your interest rates, such as your credit score, your debt-to-income ratio, and loan amount. That’s why the average mortgage rates you see on the internet may not reflect the rate you’re able to secure. Still, knowing what average mortgage rates are can help you figure out if you’re getting a good deal from your lender or if you need to look elsewhere.

What are the mortgage rates today?

Mortgage type Interest rate APR
30-year fixed rate 3.47% 3.54%
15-year fixed rate 2.87 % 2.99%
7/1 ARM 3.23% 3.23%
5/1 ARM 3.16% 3.21%
3/1 ARM 3.95% 3.36 %

*Data sourced from Zillow. Verified as of 05/14/2020.

Bank mortgage rates are always changing and can be different from day-to-day. They may also vary by lender. So to get the most accurate and up-to-date rates, make sure you check your lender’s website.

What impacts mortgage rates?

Several factors influence mortgage interest rates, but not all of them are under your control.

Inflation affects rates because lenders have to charge enough interest to turn a profit. Job growth and the state of the economy also come into play. In a hot housing market, when demand for mortgages is high, interest rates tend to rise. And the Federal Reserve’s decision to cut or raise the benchmark federal funds rate could also impact what interest rate you receive when you apply for a mortgage.

Although some of those factors are out of your hands, there are many things you can do to qualify for better rates. Raising your credit score and getting your debt-to-income ratio under control will help you qualify for the best terms. Making a larger down payment can also reduce your interest rate and eliminate private mortgage insurance, saving you even more money.

Mortgages with shorter terms also come with lower interest rates. So, if you choose a 15-year mortgage over the standard 30 years, you could save thousands. (Although those savings come at the cost of a much higher monthly payment.)

What are the different mortgage types?

Another factor that influences your mortgage rate is loan type. Certain mortgages — like jumbo loans — tend to have higher interest rates because lenders take on more risk by issuing them. Here are some of the most common mortgage types and how their rates compare:

  • Fixed-rate mortgages have the same interest rate for the whole life of the loan, which makes it easy to budget for your monthly payment.
  • Adjustable-rate mortgages have interest rates that change over time based on market conditions. Most adjustable-rate loans have a fixed-rate period that lasts for several years and then adjusts annually. They usually start with lower rates than conventional mortgages, but often end up costing you more in the long run.
  • Government-issued mortgages are insured by the government, which means your lender will be reimbursed if you default on your loan. Because government loans are guaranteed and present less of a risk for lenders, they’re often easier to qualify for and come with better rates and terms than conventional mortgages.  Examples of government-issued mortgages include VA, FHA, and USDA loans.
  • Jumbo mortgages don’t adhere to loan limits and other guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac. They enable you to borrow more than the limits if you want a more expensive home but do come with higher interest rates to account for the increased risk.

How do mortgage payments work?

Mortgage payments typically include property taxes, insurance, interest, and principal, which is the amount of money you borrowed. For the first few years, your payments will consist of more interest, so less money will go toward paying down your principal. As you chip away at your balance, you’ll be charged less interest and pay off more of your principal with each payment. This is because interest is calculated as a percentage of your remaining balance — as it decreases, so do your interest payments.

Although the proportion of principal and interest you pay changes throughout the life of your loan, your monthly payment will stay the same unless your homeowner’s insurance or taxes increase. As soon as you know what mortgage interest rate you qualify for and how much money you want to borrow, you can estimate your monthly payment.

So, how do I get the best mortgage rate?

Your interest rate has a huge effect on how much money you’ll pay over the life of your loan. Even a difference of one-half a percentage point could save or cost you thousands. So how do you qualify for the best mortgage rates?

Your debt-to-income ratio is one of the most important factors that determine your interest rate. If you want to qualify for the best mortgage rates, you should keep your debt-to-income ratio under 36%. If yours is above this threshold, you may want to pay off some debt or increase your income before you apply for a mortgage.

Another thing you can do to qualify for the best terms is to raise your credit score. Lenders offer the best rates to borrowers with “very good to excellent” credit, which starts at 740. You can improve your credit by correcting errors on your credit report, paying your bills on time, and adding your utility or phone payment history to your credit file. You should also limit the amount of new credit that you apply for, as hard inquiries on your credit report can cause your credit score to drop temporarily.

Lastly, shop around. Each lender will offer you a rate based on their assessment of your situation. By checking with at least three lenders, you improve the chances of getting a lower rate.

The bottom line

Your mortgage rate determines the amount of interest you’ll pay over the life of your loan. Getting an interest rate that’s even half a percent lower can save you a significant amount, so it’s important to do what you can to get the lowest rate available to you. Some of the most effective steps you can take are decreasing your debt-to-income ratio, increasing your credit score, and shopping around to find the best deal.

Frequently asked questions

What is a good mortgage rate? 

A good mortgage rate is anything at or below the average, which is 3.72% as of March 2020.

Are mortgage rates going down? 

From January to March 2020, interest rates decreased from 3.74% to 3.63%. Fannie Mae predicts that this downward trend will continue into 2021. But since mortgage rates change so frequently, it’s hard to predict what will happen in the coming months, especially with the global impact of the coronavirus.

What is the difference between interest rate and APR? 

The interest rate is the amount of interest you’ll pay on your loan annually. The annual percentage rate (APR) includes the interest rate as well as other fees, so it better reflects the total cost of your home loan.

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