Current Mortgage Rates Have Jumped yet Again – MoneyMarch 25, 2022
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This week, the average rate on a 30-year fixed-rate mortgage jumped more than a quarter of a percent to 4.42%, according to Freddie Mac. Last week was the first time the 30-year rate crossed 4% in almost three years.
Mortgage rates on all other loan types moved up as well.
For its rate survey, Freddie Mac looks at rates offered for the week ending each Thursday. The average rate represents roughly the rate a borrower with strong credit and a 20% down payment can expect to see when applying for a mortgage right now. Borrowers with lower credit scores will generally be offered higher rates.
On the other hand, Money’s daily mortgage rate survey is based on the previous day’s lending activity and represents the average rate a borrower with a 700 credit score and 20% down should expect. Keep in mind that available rates vary by lender and change constantly.
If you are offered a rate that is higher than you expect, make sure to ask why and compare offers from multiple lenders. (Money’s list of the Best Mortgage Lenders is a good place to start.)
This week’s mortgage rates are higher:
The rate on your mortgage can make a big difference in how much home you can afford and the size of your monthly payments.
If you bought a $250,000 home and made a 20% down payment — $50,000 — you would end up with a starting loan balance of $200,000. On a $200,000 home loan with a fixed rate for 30 years:
You can experiment with a mortgage calculator to find out how much a lower rate or other changes could impact what you pay. A home affordability calculator can also give you an estimate of the maximum loan amount you may qualify for based on your income, debt-to-income ratio, mortgage interest rate and other variables.
Other factors that determine how much you’ll pay each month include:
Choosing a 15-year mortgage instead of a 30-year mortgage will increase monthly mortgage payments but reduce the amount of interest paid throughout the life of the loan.
Fixed vs. ARM:
The mortgage rates on adjustable-rate mortgages reset regularly (after an introductory period) and monthly payments change with it. With a fixed-rate loan payments remain the same throughout the life of the loan.
Taxes, HOA Fees, Insurance:
Homeowners’ insurance premiums, property taxes and homeowners association fees are often bundled into your monthly mortgage payment. Check with your real estate agent to get an estimate of these costs.
Mortgage insurance costs up to 1% of your home loan’s value per year. Borrowers with conventional loans can avoid private mortgage insurance by making a 20% down payment or reaching 20% home equity. FHA borrowers pay a mortgage insurance premium throughout the life of the loan.
Some buyers finance their new home’s closing costs into the loan, which adds to the debt and increases monthly payments. Closing costs generally run between 2% and 5% and the sale prices.
Mortgage rates have been rising since the start of the year and are likely to continue rising in the months ahead.
Some economists expect average 30-year rates to end the year near 5% — though some borrowers are already being offered rates that high, especially if they don’t have perfect credit.
“The window of record-breaking mortgage rates has closed,” said George Ratiu, Realtor.com’s manager of economic research, in a statement responding to this week’s Freddie Mac report. “The road ahead points to a return toward mortgage rates more typical of the past two decades.”
That means today’s homebuyers will be met with a one-two punch of high rates and high home prices. At current levels, someone buying a median-priced home right now would have to spend $375 more on monthly mortgage payments than if they had bought a median-priced home a year ago.
The latest rise in mortgage rates is at least partially a response to action from the Federal Reserve. Last week, the Fed raised the federal funds rate a quarter of a percent in an effort to combat inflation. This week, Fed Chair Jerome Powell said larger increases may be necessary in the near future.
The Fed does not set mortgage rates. However, Powell’s comments led the yield on the 10-year Treasury to reach 2.295% Thursday morning. The 20-year mortgage rates tends to be 1.8 percentage points higher than the 10-year Treasury.
“Rising inflation, escalating geopolitical uncertainty and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power,” noted Sam Khater, Freddie Mac’s chief economist, in a statement. “In short, the rise in mortgage rates, combined with continued house price appreciation, is increasing monthly mortgage payments and quickly affecting homebuyers’ ability to keep up with the market.”
The total number of loan applications was 8.1% lower for the week ending March 18, according to the Mortgage Bankers Association. Once again, the overall decline was driven by a drop in refinancing.
“First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” said Mike Fratantoni, chief economist at MBA in a statement. “Repeat homebuyers, who are more likely to use conventional loans, benefit from the gains in home equity realized on a sale which can be used to fuel their next purchase, even with rates moving higher.”
Locking in a rate as soon as you have an accepted offer on a house (and find a rate you’re comfortable with) can help guarantee a competitive rate and affordable monthly payments on your home mortgage. A rate lock means that your lender will guarantee you an agreed-upon rate for typically 45 to 60 days, regardless of what happens with average rates. Locking in a competitive rate can protect the borrower from rising interest rates before closing on the mortgage
It may be tempting to wait to see if interest rates will drop lower before getting a mortgage rate lock, but this may not be necessary. Ask your lender about “float-down” options, which allow you to snag a lower rate if the market changes during your lock period. These usually cost a few hundred dollars.
Discount points are a way for borrowers to reduce the interest rate they will pay on a mortgage. By buying points, you’re basically prepaying some of the interest the bank charges on the loan. In return for prepaying, you get a lower interest rate which can lead to a lower monthly payment and savings on the overall cost of the loan over its full term.
A mortgage discount point normally costs 1% of your loan amount and could shave up to 0.25 percentage points off your interest rate. (So, with a $200,000 mortgage loan, a point would cost $2,000.) The exact reduction varies by lender. Always check with the lender to see how much of a reduction each point will make.
Discount points only pay off if you keep the home long enough. Selling the home or refinancing the mortgage before you break even would short circuit the discount point strategy.
In some cases, it makes more sense to put extra cash toward your down payment instead of discount points If a larger down payment could help you avoid paying PMI premiums, for example.
A good mortgage rate is one where you can comfortably afford the monthly payments and where the other loan details fit your needs. Consider details such as the loan type (i.e. whether the rate is fixed or adjustable), length of the loan, origination fees and other costs.
That said, today’s mortgage rates are near historic lows. Freddie Mac’s average rates show what a borrower with a 20% down payment and a strong credit score might be able to get if they were to speak to a lender this week. If you are making a smaller down payment, have a lower credit score or are taking out a non-conforming (or jumbo loan) mortgage, you may see a higher rate. Money’s daily mortgage rate data shows borrowers with 700 credit scores are finding rates around 3.6% right now.
Most mortgage lenders use your FICO score — a credit score created by the Fair Isaac Corporation — to determine your loan eligibility.
Lenders will request a merged credit report that combines information from all three of the major credit reporting bureaus — Experian, Transunion and Equifax. This report will also contain your FICO score as reported by each credit agency.
Each credit bureau will have a different FICO score and your lender will typically use the middle score when evaluating your creditworthiness. If you are applying for a mortgage with a partner, the lender can base their decision on the average credit score between both borrowers.
Lenders may also use a more thorough residential mortgage credit report that includes more detailed information that won’t appear in your standard reports, such as employment history and current salary.
Borrowers often mix up interest rates and an annual percentage rate (APR). That’s understandable since both rates refer to how much you’ll pay for the loan. While similar in nature, the terms are not synonymous.
An interest rate is what a lender will charge on the principal amount being borrowed. Think of it as the basic cost of borrowing money for a home purchase.
An APR represents the total cost of borrowing the money and includes the interest rate plus any fees, associated with generating the loan. The APR will always be higher than the interest rate.
For example, a loan with a 3.1% interest rate and $2,100 worth of fees would have an APR of 3.169%.
When comparing rates from different lenders, look at both the APR and the interest rate. The APR will represent the true cost over the full term of the loan, but you’ll also need to consider what you’re able to pay upfront versus over time.
Lenders use a number of factors to set rates each day. Every lender’s formula will be a little different but will factor in current federal funds rate (a short-term rate set by the Federal Reserve), competitor rates and even how much staff they have available to underwrite loans. Your individual qualifications will also impact the rate you are offered.
In general, rates track the yields on the 10-year Treasury note. Average mortgage rates are usually about 1.8 percentage points higher than the yield on the 10-year note.
Yields matter because lenders don’t keep the mortgage they originate on their books for long. Instead, in order to free up money to keep originating more loans, lenders sell their mortgages to entities like Freddie Mac and Fannie Mae. These mortgages are then packaged into what are called mortgage-backed securities and sold to investors. Investors will only buy if they can earn a bit more than they can on the government notes.
Shopping around for the best mortgage rate can mean a lower rate and big savings. On average, borrowers who get a rate quote from one additional lender save $1,500 over the life of the loan, according to Freddie Mac. That number goes up to $3,000 if you get five quotes.
The best mortgage lender for you will be the one that can give you the lowest rate and the terms you want. Your local bank or credit union is one place to look. Online lenders have expanded their market share over the past decade and promise to get you pre-approved within minutes.
Shop around to compare rates and terms, and make sure your lender has the type of mortgage you need. Not all lenders write FHA loans, USDA-backed mortgages or VA loans, for example. If you’re not sure about a lender’s credentials, ask for its NMLS number and search for online reviews.
Not all applicants will receive the very best rates when taking out a new mortgage or refinancing. Credit scores, loan term, interest rate types (fixed or adjustable), down payment size, home location and the loan size will all affect mortgage rates offered to individual home shoppers.
Rates also vary between mortgage lenders. It’s estimated that about half of all buyers only look at one lender, primarily because they tend to trust referrals from their real estate agent. Yet this means that they may miss out on a lower rate elsewhere.
Freddie Mac estimates that buyers who got offers from five different lenders averaged 0.17 percentage points lower on their interest rate than those who didn’t get multiple quotes. If you want to find the best rate and term for your loan, it makes sense to shop around first.
Determining whether it’s the right time to refinance your home loan or not involves a number of factors. Most experts agree you should consider a mortgage refinancing if your current mortgage rate exceeds today’s mortgage rates by 0.75 percentage points. Some say a refi can make sense if you can reduce your mortgage rate by as little as 0.5 percentage points (for example from 3.5% to 3%). It doesn’t make sense to refinance every time rates decline a little bit because mortgage fees would cut into your savings.
Many of the best mortgage refinance lenders can give you free rate quotes to help you decide whether the money you’d save in interest justifies the cost of a new loan. Try to get a quote with a soft credit check which won’t hurt your credit score.
You could increase interest savings by going with a shorter loan term such as a 15-year mortgage. Your payments will be higher, but you could save on interest charges over time, and you’d pay off your house sooner.
How much does the interest rate affect mortgage payments?
In general, the lower the interest rate the lower your monthly payments will be. For example:
You can use a mortgage calculator to determine how different mortgage rates and down payments will affect your monthly payment. Consider steps for improving your credit score in order to qualify for a better rate.
This week’s mortgage rates are higher:
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