How Consumers Can Secure A Low Interest Rate
While economic factors are out of the control of consumers, Westreich believes home buyers can help still improve their shot at getting a lower interest rate, as mortgage rates “are determined for the most part on two factors: credit score and equity/down payment.”
He strongly advocates to save up as much as possible for a down payment while simultaneously working to improve your . He told Select that consumers should “pay down all revolving debt to 30% of the credit limit and try not to open or close any accounts.” Essentially you need to keep your and avoid opening or closing any new credit cards or loans before you apply for a mortgage.
Tara Falcone, CFP and founder of the goals-first investing app Reason, reiterates Westreich’s mantra adding that consumers should think and prepare carefully before buying.
“It’s important to focus on the total purchase price rather than the monthly payment,” she said. It may be tempting to buy a home you qualify for, but even if you lock in a low interest rate, being ‘house poor’ isn’t a recommended strategy.
And just like any other financial decision, Falcone recommends consumers take the time to shop around to get the best interest rate.
“Get referrals for mortgage lenders from people you know and trust in your area,” said Falcone. “Speak to everyone from banks to online mortgage lenders, and make sure to do your own rate research ahead of time.”
Other Factors Impacting Mortgage Rates
Another important factor impacting rates is processing capacity constraints at mortgage lenders.
When lenders are capacity constrained because of too many applications to review in their system, they may be simply unable to process enough application in time, and may opt to raise interest rates.
Note that mortgage lenders are typically free to offer the rates they seem appropriate, so long as they are in full compliance with the Equal Credit Opportunity Act, federal and state statutes and are not discriminating against a borrower and within state usury limits.
This is in part driven by strategic interests of mortgage lenders and also their current lending portfolio. Lenders freedom to set arbitrary rates within usury limits impacts borrowers significantly and makes shopping for mortgage rates an important step for mortgage seekers.
How Mortgage Rates Are Adjusted
It’s no secret that COVID-19 did a number on the economy, bringing entire economic sectors to a screeching halt, and leading to the concern that the housing market was about to go into a deep freeze. In an indirect way, the global pandemic is responsible for the current low mortgage interest rates, which are responsible for more mortgage applications. Here’s how that happened.
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How Much Could Higher Rates Cost You
It pays to put your possible payment in perspective, if you’re looking to buy a home.
Take, for example, someone who plans to take on a $200,000 mortgage.
At 2.65% for a 30-year fixed rate mortgage, the average payment would be excluding property taxes and private mortgage insurance around $806 a month. That would add up to nearly $90,134 in total interest over the life of the loan.
Go to 3.65% and the monthly payment would increase by nearly $109 a month to a payment of about $915 a month, again just covering the principal and interest cost. The total interest would be nearly $129,371 over the life of the loan.
Jump all the way up to 5% for that 30-year fixed rate and the payment would be nearly $1,074 a month. That adds up to around $186,513 in total interest over the life of the loan.
Expert Mortgage Rate Forecasts
Looking further ahead, Fannie Mae, Freddie Mac and the Mortgage Bankers Association each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their current rate forecasts for the four quarters of 2022 .
The numbers in the table below are for 30year, fixedrate mortgages. Fannies were published on Feb. 18 and the MBAs on Feb. 25. But Freddie now publishes these forecasts every quarter, most recently on Jan. 21.
Of course, given so many unknowables, the whole current crop of forecasts may be even more speculative than usual.
Which Option Is Right For You
Perhaps the best thing you can do it run the numbers on each option. Decide how much you could save with a blend-and-extend . Then calculate how much youd save by breaking up with your lender. Whichever option results in more savings is probably the option youll want to go with.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium service or advisor. Were Motley! Questioning an investing thesis even one of our own helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Why Mortgage Rates Could Go Even Lower
by Maurie Backman | Updated July 19, 2021 – First published on Sept. 23, 2020
Mortgage rates are already unbelievably low. But will they keep dropping?
The summer of 2020 has been the summer of low mortgage rates. In mid-July, the average rate for a 30-year fixed mortgage dropped to 2.98%. That was a record at the time. Then, in early August, the 30-year mortgage reached a new record low of 2.88%. And just when we thought rates couldn’t get any better, lo and behold, September brought about another record — this time 2.86% for the 30-year loan.
Clearly, these astonishingly low rates are worth capitalizing on. Or are they? Some borrowers may want to lock in a mortgage immediately, but the reality is that rates could actually keep getting lower. Here are a few reasons why.
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Comparing Different Mortgage Terms
The 30-year fixed-rate mortgage is the most popular option for homeowners, and this type of loan has a number of advantages, including:
- Lower monthly payment: Compared to a shorter term, such as 15 years, the 30-year mortgage offers lower payments spread over time.
- Stability: With a 30-year mortgage, you lock in a consistent principal and interest payment. Because of the predictability, you can plan your housing expenses for the long term. Remember: Your monthly housing payment can change if your homeowners insurance and property taxes go up or, less likely, down.
- Buying power: With lower payments, you can qualify for a larger loan amount and a more expensive home.
- Flexibility: Lower monthly payments can free up some of your monthly budget for other goals, like saving for emergencies, retirement, college tuition or home repairs and maintenance.
- Strategic use of debt: Some argue that Americans focus too much on paying down their mortgages rather than adding to their retirement accounts. A 30-year fixed mortgage with a smaller monthly payment can allow you to save more for retirement.
That said, shorter term loans have gained popularity as rates have been historically low. Although they have higher monthly payments compared to 30-year mortgages, there are some big benefits if you can afford the upfront costs. Shorter-term loans can help you achieve:
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So How Are Mortgage Rates Set
- There are a variety of factors involved, including the state of the economy
- Related bond yields like the 10-year Treasury
- And lender and investor appetite for mortgage-backed securities
- Your borrower/property-specific loan attributes will also come into play
Nows let discuss how mortgage rates are determined.
Although there are a variety of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall. But why?
Well, even though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years.
So the 10-year bond can be a great bellwether to gauge the direction of interest rates on home loans.
Treasuries are also backed by the full faith and credit of the United States, making them the benchmark for many other bonds as well.
Additionally, 10-year Treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities , compete for the same investors because they are fairly similar financial instruments.
However, treasuries are 100% guaranteed to be paid back on schedule, while mortgage-backed securities are not, for reasons such as payment default and early repayment.
As a result, mortgage bonds carry more risk and must be priced higher to compensate investors.
Which Mortgage Loan Is Best
The best mortgage for you depends on your financial situation and your goals.
For instance, if you want to buy a high-priced home and you have great credit, a jumbo loan is your best bet. Jumbo mortgages allow loan amounts above conforming loan limits which max out at $548,250 in most parts of the U.S.
On the other hand, if youre a veteran or service member, a VA loan is almost always the right choice.
VA loans are backed by the U.S. Department of Veterans Affairs. They provide ultra-low rates and never charge private mortgage insurance . But you need an eligible service history to qualify.
Conforming loans and FHA loans are great low-down-payment options.
Conforming loans allow as little as 3% down with FICO scores starting at 620.
FHA loans are even more lenient about credit home buyers can often qualify with a score of 580 or higher, and a less-than-perfect credit history might not disqualify you.
Finally, consider a USDA loan if you want to buy or refinance real estate in a rural area. USDA loans have below-market rates similar to VA and reduced mortgage insurance costs. The catch? You need to live in a rural area and have moderate or low income to be USDA-eligible.
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/1 Adjustable Rate Mortgage Climbs +001%
The average rate on a 5/1 ARM is 2.94 percent, up 1 basis point from a week ago.
Adjustable-rate mortgages, or ARMs, are mortgage loans that come with a floating interest rate. To put it another way, the interest rate can change from time to time throughout the life of the loan, unlike fixed-rate loans. These types of loans are best for those who expect to refinance or sell before the first or second adjustment. Rates could be considerably higher when the loan first adjusts, and thereafter.
Monthly payments on a 5/1 ARM at 2.94 percent would cost about $415 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loans terms.
Historical Mortgage Rates Chart: Trends Over Time
Despite recent rises, todays 30year mortgage rates are still ultralow from a historical perspective.
Freddie Mac the main industry source for mortgage rates has been keeping records since 1971.
Between 1971 and December 2020, 30year mortgage rates averaged 7.89%.
But between January and October of 2021, they averaged just 2.93%.
Even if rates keep rising, many experts predict they wont go above 4% in 2022. That means home buyers and homeowners should keep enjoying rates that are about half the historical average.
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Lower Mortgage Rates Are Already Being Offered
Finally, were already seeing certain mortgage lenders offer the 30-year fixed below 2%. So its not just a question of if, its already a reality.
This week, wholesale mortgage lender UWM announced the availability of a 1.999% 30-year fixed mortgage rate via its Conquest program.
In order to get that rate, you need to work with a mortgage broker since UWM doesnt work directly with the public.
You also need to qualify for that rate by being a solid borrower with a vanilla loan scenario, e.g. excellent credit score, low LTV, conforming loan amount, etc.
And theres a good chance youll need to pay mortgage discount points to obtain that rate.
That brings up another important point it may not be wise to pay points right now given the trend of lower and lower mortgage rates.
If youre just going to refinance your mortgage a second time a couple months later, you certainly dont want to pay lots of money upfront for a home loan youll barely keep, and thus not actually benefit from.
Now in terms of how low mortgage rates will go, thats anybodys guess, but at this point I wouldnt rule anything out.
Were already seeing mortgage rates in the 1% range, and weve got the potential for a very wild second half of the year with a contentious U.S. presidential election and a stock market that refuses to read the writing on the wall.
How To Find The Best Rates
Interest rates can differ widely based on overall market forces, the size of the loan, your location, your financial situation and how motivated lenders are to get your business. Keep in mind that the rates we cite are market averagessome people will be quoted higher or lower or that exact rate, and the rate may change daily even at the same lender.
Its important when youre looking for a mortgage to shop around and compare all the terms of your offers, not just the interest rate youre being quoted. Your best rate and terms may be from an online lender, the bank down the street or perhaps through a mortgage broker. You wont know unless you shop multiple lenders through multiple channels.
Bankrate is a great place to start, because you can take advantage of our mortgage rate comparison tool and remain current on todays rates. If youre not happy with the results you see between these pages, you should check with the institution where you do your banking, and other small lenders like credit unions or local banks.
How High Could Mortgage Rates Go
As much as people may be shocked by the recent mortgage rate hikes, rates still aren’t anywhere close to historically high levels or even what we’ve seen just a few years ago.
The average 30-year rate was 4% nearly three years ago back in May 2019, according to Gumbinger at HSH.com.
But the last time borrowers saw 30-year rates routinely in the 5% range was 2011.
If you go back to January 1982, when inflation was hot, the average 30-year fixed rate was more than 18%, he said.
Amazingly, he said, the low point during the pandemic was back in January 2021 when the average 30-year rate hit 2.65%.
“The lowest mortgage rates come in the worst economic climates,” Gumbinger said.
Gumbinger said he does not expect rates to shoot up to 4% and stay there in 2022. Instead, he’s expecting that the 30-year rate could peak at around 3.75% or 3.8% this year. But he was surprised by the rapid climb so far.
If inflation cools off, mortgage rates could trend somewhat lower, too.
Why Are Rates Lower For A 15
Rates for mortgages are set based on bond prices in the mortgage-backed securities market. Investors of bonds want to park their cash in a more low-risk investment, one that offers a decent rate of return that will keep up with the rate of inflation.
Since inflation rates tend to go up over time, longer-term loans will have higher interest rates compared to short-term ones. Thats because investors can’t accurately project inflation rates farther in advance.
Freddie Mac and Fannie Mae, both government-supported agencies, also impose price adjustments for loan levels, driving up costs of 30-year mortgages. Many 15-year mortgages dont have these additional fees, which is reflected in a lower rate.
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