Most expected mortgage rates to rise this year, but it happened faster than predicted, with rates breaking through 6 percent on some 30-year fixed loan offers in June — a figure not seen since 2008.
Although the Federal Reserve doesn’t influence rates on fixed mortgages, its recent move to raise the federal funds rate due to inflation — and the indication it’ll continue to raise that rate this year — does have some impact on mortgages.
That means it’s more important than ever to compare rates before selecting a lender.
“Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” says Greg McBride, Bankrate’s chief financial analyst.
He adds that now is not a good time to agree to an adjustable-rate mortgage (ARM), even if the initial interest rate seems low.
While rising rates are likely to have a few knock-on effects in the housing market, they probably won’t cause housing prices to decline significantly.
“More than a decade of chronic underbuilding and millions of millennials moving into the homebuying stage of life has created a significant imbalance between housing supply and demand,” says McBride. “While rapidly rising mortgage rates may temper the demand somewhat, don’t expect home price appreciation to come to a halt. A more modest pace of appreciation is the likelier outcome.”
The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, like savings accounts and CD rates. However, the Fed does set borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate. The federal funds rate can have a knock-on effect on 10-year Treasury bond yields, which is what most mortgage rates are tied to. Basically, the Fed does not directly set mortgage rates, but its policies can influence the financial markets and movers that do.
Because a home is usually the biggest purchase a person makes, a mortgage is usually a household’s largest chunk of debt. Getting the best possible terms on your loan can mean a difference of hundreds of extra dollars in or out of your budget each month, and tens of thousands of dollars in or out of your pocket over the life of the loan. It’s important to prepare for the mortgage application process to ensure you get the best rate and monthly payments within your budget.
There are many different types of mortgages and it’s important to understand your options so you can select the loan that’s best for you: conventional, government-insured or jumbo loans, also known as non-conforming mortgages.
Conventional mortgages
These are loans that often ultimately are bought by Fannie Mae or Freddie Mac, the big government-sponsored enterprises that play an important role in the mortgage lending market.
Fixed-rate mortgages
A fixed-rate mortgage has an interest rate that doesn’t change throughout the life of the loan. In that way, borrowers are not exposed to rate fluctuations. For example, if you have a fixed-rate mortgage with a 5.2 percent interest rate and prevailing rates shoot up to 7 percent the next week, year or decade, your interest rate is locked in, so you don’t ever have to worry about paying more. Of course, if rates fall, you’ll be stuck with your higher rate unless you refinance. There are many types of fixed-rate mortgages, such as 15-year fixed rate, jumbo fixed rate and 30-year fixed rate mortgages.
Adjustable-rate mortgages
Adjustable-rate mortgages, or ARMs, have an initial fixed-rate period during which the interest rate doesn’t change, followed by a longer period during which the rate may change at preset intervals. Unlike a fixed-rate mortgage, ARMs are affected by market fluctuations, so if rates drop, your mortgage payments will drop. However, the reverse is also true: When rates rise, your monthly payments will also rise. Generally, interest rates are lower to start than with fixed-rate mortgages, but since they’re not locked into a set rate, you won’t be able to predict future monthly payments. ARMs come with an interest rate cap above which your loan cannot rise.
Government-insured or government-backed loans are backed by three agencies: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans). The U.S. government isn’t a mortgage lender, but it sets the basic guidelines for each loan type offered through private lenders. Government-backed loans can be good options for first-time homebuyers as well as borrowers who have a lower down payment or smaller budget. The requirements are usually looser than those for mortgages not secured by the government (conventional mortgages). The interest rates on FHA, VA and USDA loans are similar to those on conventional mortgages, but fees and other costs are higher.
Non-conforming mortgages
Jumbo mortgages
Jumbo mortgages are loans that exceed federal loan limits for conforming loan values. For 2022, the maximum conforming loan limit for single-family homes in most of the U.S. is $647,200, and $970,800 in more expensive locales. Jumbo loans are more common in higher-cost areas and generally require more in-depth documentation to qualify. Jumbo loans are also a bit more expensive than conforming loans.
The amount you can borrow depends on a variety of factors, including how much you’re qualified for (depending on your income, among other factors) as well as what type of loan you have. Conforming mortgages have limits while jumbo loans allow borrowers to exceed those limits. It’s a good idea to figure out your budget before you start shopping for a home, so check out Bankrate’s “How much house can I afford?” calculator.
Both prequalification and preapproval indicate how likely you are to get a loan, but a preapproval is usually seen by sellers as a stronger indicator because it requires submitting a formal loan application and providing extensive documentation regarding your income, savings and debt, such as credit cards and student loans. Your mortgage lender uses this information to determine whether to offer you a loan, and at what maximum amount and interest rate.
Meanwhile, a prequalification is more streamlined, but only gives a general indication that you could be approved for a mortgage if you were to formally apply. It will not suffice as evidence you have financing if you make an offer on a home.
Shopping around for quotes from multiple lenders is one of Bankrate’s most crucial pieces of advice for every mortgage applicant. When you shop, it’s important to think about not just the interest rate you’re being quoted, but also all the other terms of the loan. Be sure to compare APRs, which include many additional costs of the mortgage not shown in the interest rate. Keep in mind that some institutions may have lower closing costs than others, or your current bank may extend you a special offer. There’s always some variability between lenders on both rates and terms, so make sure you understand the full picture of each offer, and think about what will suit your situation best. Comparison-shopping on Bankrate is especially smart, because our relationships with lenders can help you get special low rates.
Step 1: Determine what mortgage is right for you
When finding current mortgage rates, the first step is to decide what type of mortgage best suits your goals and budget. Consider your credit score and down payment, how long you plan to stay in the home, how much you can afford in monthly payments and whether you have the risk tolerance for a variable-rate loan versus a fixed-rate loan.
Once you decide which mortgage type fits your needs, you can begin comparing current mortgage options. There’s only one way to be sure you’re getting the best available rate, and that’s to shop at least three lenders, including large banks, credit unions and online lenders, or by using a mortgage broker. Bankrate offers a mortgage rates comparison tool to help you find the right rate from a variety of lenders.
Keep in mind that mortgage rates change daily, even hourly, based on market conditions, and can vary by loan type and term. To ensure you’re getting accurate rate quotes, compare loan estimates based on the same term and product, and aim to get your quotes all on the same day.
Step 3: Choose the best mortgage offer
Bankrate’s mortgage calculator can help you estimate your monthly mortgage payment, which can be useful as you consider your budget. Look at the APR, not just the interest rate. The APR is the total cost of the loan, including the interest rate and other fees. Some lenders might have the same interest rate but different APRs, which means you’ll be charged different fees.
Mortgage lenders come in all shapes and sizes, from online companies to brick-and-mortar banks — and some are a mix of both. Decide what type of service and access you want from a lender and balance that with how competitive their rates are. You might decide that getting the lowest rate is the most important factor for you, while others might go with a slightly higher rate because they can apply in person, for example. Some banks offer discounts to existing customers, so you might be able to save money by getting a loan where your savings account or checking account is.
If your credit is a bit tarnished, many lenders offer loans with lower down payment and credit requirements through the FHA. Veterans might find VA mortgages especially attractive.
Lenders consider these factors when pricing your interest rate:
Credit score
Down payment
Property location
Loan amount/closing costs
Loan type
Loan term
Interest rate type
Your credit score is the most important driver of your mortgage rate. Lenders have settled on this three-digit score as the most reliable predictor of whether you’ll make prompt payments. The higher your score, the less risk you pose in the lender’s view — and the lower rate you’ll pay.
Lenders also consider how much you’re putting down. The greater share of the home’s total value you pay upfront, the more favorably they view your application. The kind of mortgage you choose can affect your rate, too, with shorter-term loans like 15-year mortgages typically having lower rates compared to 30-year ones.
Lenders reserve their most competitive rates to borrowers with excellent credit scores — usually 740 or higher. However, you don’t need spotless credit to qualify for a mortgage. Loans insured by the Federal Housing Administration, or FHA, have a minimum credit score requirement of 580, although you’ll probably need a score of 620 or higher to qualify with most lenders. (While FHA loans offer competitive rates, the fees are steep.)
To score the best deal, work to boost your credit score above 740. While you can get a mortgage with poor or bad credit, your interest rate and terms may not be as favorable.
The difference between APR and interest rate is that the APR (annual percentage rate) is the total cost of the loan including interest rate and all fees. The interest rate is just the amount of interest the lender will charge you for the loan, not including any of the administrative costs. By capturing points and fees, the APR is a more accurate picture of how much the loan will cost you, and allows you to compare loan offers with differing interest rates and fees.
Here’s what may be included in the APR:
Interest rate – This is simply the percentage rate paid over the life of the loan.
Points – This is an upfront fee the borrower can opt to pay to lower the interest rate of the loan. Each point, which is also known as a discount point, costs 1 percent of the mortgage amount. So, one point on a $300,000 mortgage would cost $3,000 upfront.
Mortgage broker fees – Brokers can help borrowers find a better rate and terms, but their services must be paid for when the loan closes. This cost is shown in the APR and can vary. The broker’s commission typically ranges from 0.50 percent to 2.75 percent of the loan principal.
Some closing costs, including loan origination fees – but title insurance and prepaid items are not included, and these costs are considerable. Closing costs typically range from about 2 to 5 percent of the loan amount.
A mortgage is a type of loan designed for buying a home. Mortgage loans allow buyers to break up their payments over a set number of years, paying an agreed amount of interest. Mortgages are also legal documents that allow the mortgage holder to (re)claim the property if the buyer doesn’t make their payments. It also protects the buyer by forbidding the mortgage holder from taking the property while regular payments are being made. In this way, mortgages protect both the mortgage holder and the buyer.
A mortgage rate lock freezes the interest rate. The lender guarantees (with a few exceptions) that the mortgage rate offered to a borrower will remain available to that borrower for a stated period of time. With a lock, the borrower doesn’t have to worry if rates go up between the time they submit an offer and when they close on the home.
When should I lock my mortgage rate?
Most lenders offer a 30- to 45-day rate lock free of charge. This means if the interest rate increases before your loan closes, you get the stated rate. However, if rates fall, you won’t benefit unless you restart the loan process, a costly and time-consuming endeavor.
Although some lenders offer a free rate lock for a specified period, after that period they may charge fees for extending the lock.
Homeownership is synonymous with the American Dream, but the housing boom has pushed this goal out of reach of many. Some of the advantages and disadvantages of homeownership:
Pros
A home is a powerful way to build wealth over time.
Homeownership provides the certainty of knowing where you’ll live from one year to the next.
With a fixed-rate mortgage, you know your principal and interest costs won’t change. A landlord can boost your rent when your lease is up.
Cons
Homeownership is expensive, prohibitively so in some markets.
Maintenance and repairs are a constant — and costly — reality for homeowners.
As home values rise, so do insurance premiums and property taxes.
Mortgage points, also referred to as discount points, help homebuyers reduce their monthly mortgage payments and interest rates. A mortgage point is most often paid before the start of the loan period, usually during the closing process. It’s a type of prepaid interest made on the loan. Each mortgage point typically lowers an interest rate by 0.25 percentage points. For example, one point would lower a mortgage rate of 3 percent to 2.75 percent.
The cost of a point depends on the value of the borrowed money, but it’s generally 1 percent of the total amount borrowed to buy the home.
Buying points upfront can help you save money in interest over the life of your loan, but doing so also raises your closing costs. It can make sense for buyers with more disposable cash, but if high closing costs will prevent you from securing your loan, buying points might not be the right move.
Refinancing your mortgage can be a good financial move if you lock in a lower rate. However, there are upfront costs associated with refinancing, such as appraisals, underwriting fees and taxes, so you’ll want to be sure the savings outpace the refinance price tag in a reasonable amount of time — most experts say the ideal breakeven timeline is 18 to 24 months.
As mortgage rates rise, fewer homeowners will stand to benefit from refinancing, but even at their current level, millions of borrowers could still save.
Reducing your rate isn’t the only reason to refinance. It’s also possible to tap your home equity to pay for home renovation, or, if you want to pay down your mortgage more quickly, you can shorten your term to 20, 15 or even 10 years. Because home values have risen sharply in the last few years, it’s also possible that a refinance could free you from paying for private mortgage insurance.
Written by: Jeff Ostrowski, senior mortgage reporter for Bankrate
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Reviewed by: Greg McBride, chief financial analyst for Bankrate
Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience.
