“The average 30-year mortgage rate is 6.492% this week, down from 6.651% the week before, according to Zillow data provided to U.S. News. While the decrease is a welcome reprieve after weeks of increases, rates are still about 0.3 points above where they were in early March.
“Meanwhile, mortgage purchase applications fell slightly, dropping 0.8% this week, according to the Mortgage Bankers Association. Applications for mortgage refinancing are also down, which is to be expected as interest rates remain elevated for both purchase and refi mortgages.
“The ongoing tensions in Iran continue to be a factor keeping mortgage rates high. Trump’s Middle East conflict has caused oil prices to soar, and when oil prices rise, other basic necessities become more expensive to manufacture and transport. Rising inflation usually leads to rising interest rates, which has certainly been the case in the current mortgage pricing environment.
“For now, those looking to buy a home should focus on what they can control, like finding the right type of loan for their financial situation. While greater economic trends are harder to forecast, it may be possible for prospective borrowers to secure lower interest rates by shopping around wisely and comparing their mortgage options.”
Mortgage rates are determined by factors that are out of your control and those that are related to your borrower profile and the type of loan. These include:
Your Credit Risk
The riskier you are in the eyes of a lender, the higher you can expect your rate to be, says Jeremy Sopko, CEO of the mortgage lender Nations Lending. For example, having a high debt-to-income ratio, a poor credit score and an unstable work history means you are a higher-risk borrower. Therefore, you would likely have to pay a premium to borrow money and may even have to work with an alternative lender.
Your Down Payment
How much or how little money you put toward a down payment can also impact your interest rate. In most cases, with all other things being equal, the person putting down 3% will not get as favorable of a rate as someone putting down 20%.
“If you have less skin in the game, you’re a riskier borrower,” Sopko says.
The Length of Your Loan
A 30-year mortgage will have a higher rate than a 15-year one because the borrowed money is going to be out there longer, posing a higher risk to the lender, says Jerry Koors, president of Merchants Mortgage, a lender based in Indianapolis.
The Type of Mortgage You Choose
You may see some minor differences between rates if you compare the different types of home loans including conventional loans, Federal Housing Administration loans, U.S. Department of Veterans Affairs loans and jumbo loans.
“Jumbo loans are generally going to be a little bit higher, while the other loans are going to be in line with conventional loan rates because they are government-backed loans,” Koors says.
There are also adjustable-rate mortgages that may start out at a lower fixed interest rate for a set period of time but will change periodically.
Whether You Buy Discount Points
It’s possible to buy down your mortgage rate by purchasing discount points. One point is equal to 1% of the loan amount, and you can typically reduce your rate by about 0.25 percentage points for each discount point purchased – however, there’s no set formula across all mortgage lenders.
Whether purchasing discount points is worth it will depend on a number of factors, such as how long you plan on living in the house and where mortgage rates might be headed in the next five years. After all, it may be more cost-efficient to refinance down the line than to buy down your rate, but it’s difficult to know if mortgage rates will fall in the future.
The Federal Reserve doesn’t actually set or control mortgage rates, says Sopko, but its actions can affect where rates go.
“The Fed raises and lowers short-term interest rates based on broad economic factors, but Fed rates and mortgage rates move independently of one another,” he explains.
However, when demand for mortgage-backed securities (bundles of mortgages that are sold to investors) goes up, mortgage rates tend to go down, he says. In fact, to keep mortgage interest rates low throughout the coronavirus pandemic, the Federal Reserve purchased additional mortgage-backed securities.
As you shop around, you’ll quickly realize that mortgage rates fluctuate between lenders and mortgage companies. “It’s not unlike the way the price of consumer products fluctuate between retailers,” says Sopko.
There are many factors that can impact why one lender charges a certain rate over another. The two main ones are:
Perceived risk. One lender may calculate a borrower’s risk a bit differently than another. Since underwriting criteria can vary, each lender may weigh certain factors more or less heavily. While one might be strict about the required credit score needed for the lowest rate, another might give more leeway if the borrower has more assets. Lenders may also treat those with nontraditional income streams differently.
Margins. Mortgage lenders want to make a profit just like any other business, while also trying to stay competitive. “Rates will vary between lenders because each lender has its own internal cost structure and its own desire for margin above what the secondary market is paying,” explains Bill Packer, chief operating officer of Longbridge Financial, a reverse mortgage lender.
While rates are an important point of comparison when you’re reviewing loan options, be sure to look at other costs like origination fees and mortgage insurance, so you’ll get the full picture of what it’s actually costing you to get that rate. For example, one rate quote might seem lower than another, but that lender may be factoring in paying discount points, which will drive up your closing costs.
The best way to do an apples-to-apples comparison is to obtain a loan estimate with rate quotes from multiple lenders, Packer says. Then you can go through them line by line to see how each offer stacks up.
Mortgage calculators can help you understand how interest rates impact the cost of your home loan. By plugging in various numbers, you can see that even slight differences in mortgage rates can have a big effect, both in terms of monthly payment and long-term cost. For example:
On a $250,000 home with a 20% down payment on a 30-year mortgage, a 6.5% interest rate would require a $1,264 monthly payment and cost $455,089 over the life of the loan.
With a 5.5% rate, the payment goes down to $1,136 per month, and the total cost is $408,808.
Of course, there are other factors that you should include in your calculations to figure out what your true monthly mortgage cost will be, such as property taxes, home insurance and private mortgage insurance (if applicable).
Playing with various calculators can also help you figure out how much home you can actually afford before you do interest rate research and home shopping.
Homeowners may choose to refinance their mortgage for a number of reasons, but the most common is to secure a lower interest rate and/or shorter repayment term. By refinancing to a lower mortgage rate, you can reduce your monthly payments and even pay off your home loan faster.
Current mortgage refinance rates don’t play in the favor of homeowners, most of whom have a much lower interest rate than what’s available today. However, those who bought in 2022 or 2023 might finally have the opportunity to refinance in the next few years, since rates have come down considerably from their recent highs.
That being said, getting a lower mortgage rate is just one reason homeowners may choose to refinance. You can also tap into your home’s equity with a cash-out refinance or switch from an adjustable mortgage rate to a fixed one. No matter why you’re refinancing, it’s still important to shop around for the lowest possible mortgage rate for your financial situation by getting quotes from multiple lenders.
Historically speaking, a good interest rate on a mortgage is one that’s equal to or lower than the current national average. Mortgage rates have trended up and down over the last few decades, as high as 18% in the early 1980s to record-setting lows under 3% during the coronavirus pandemic. But since rates rose abruptly beginning in 2022, what’s considered a good mortgage rate today is different than it was just a few years ago.
The best mortgage rates are typically reserved for well-qualified borrowers with a good credit score in the mid-700s or higher and a low debt-to-income ratio. Having a higher down payment can also help applicants lock in a lower rate, and certain loan types – like FHA and VA loans – may offer more competitive rates.
When you get preapproved for a mortgage, lenders may provide you with an estimated interest rate. But lenders typically won’t let you lock in your mortgage rate until you’ve had an offer accepted on a home, since the rate you ultimately receive can vary based on the property address.
It’s smart to lock in a mortgage rate once you’ve entered a purchase agreement with the seller to avoid your rate and monthly payment rising unexpectedly during the closing process. However, if rates fall during closing, you could be stuck paying that agreed-upon rate, unless you have a float-down option.
Some lenders offer “lock and shop” agreements that let you lock in a rate while you’re still shopping for a home, but the cost and terms of these options vary widely – so be sure to read the fine print.
Mortgage interest rate and APR are not the same. Basically, APR is the “all-in” cost of a loan, Sopko says. That includes origination fees and mortgage insurance, whereas the interest rate is simply the yearly interest you’ll pay on the money borrowed.
That’s why it makes sense to compare the APRs of two loans in addition to looking at the interest rates because you’ll get a more comprehensive picture of your total cost. Keep in mind that there are still other items to consider that will not be reflected in the APR, such as certain closing costs.
