There are a few things to keep in mind when shopping for mortgage rates:
A good mortgage rate will depend on the borrower. Lenders will advertise the lowest rate offered but yours will depend on factors like your credit history, income, other debts, and your down payment. For instance, a good mortgage rate for someone who has a low credit score tends to be higher than for someone who has a higher credit score.
It’s important to understand what will affect your individual rate and work towards optimizing your finances so you can receive the most competitive rate based on your financial situation.
Qualifying for better mortgage rates can help you save tens of thousands of dollars over the lifetime of the loan. Here are a few ways you can ensure you find the most competitive rate possible:
In general, homeowners can afford a mortgage that’s two to two-and-a-half times their annual gross income. For instance, if you earn $80,000 a year, you can afford a mortgage from $160,000 to $200,000. Keep in mind that this is a general guideline and you need to look at additional factors when determining how much you can afford such as your lifestyle.
First, your lender will determine what it thinks you can afford based on your income, debts, assets, and liabilities. However, you need to determine how much you’re willing to spend, your current expenses—most experts recommend not spending more than 28% of your gross income on housing costs. Lenders will also look at your DTI, meaning that the higher your DTI, the less likely you’ll be able to afford a bigger mortgage.
Don’t forget to include other costs aside from your mortgage, which includes any applicable HOA fees, homeowners’ insurance, property taxes, and home maintenance costs. Using a mortgage calculator can be helpful in this situation to help you figure out how you can comfortably afford a mortgage payment.
A mortgage rate is the amount of interest determined by a lender to be charged on a mortgage. These rates can be fixed—meaning the rate is set based on a benchmark rate—for the duration of the borrower’s mortgage term or variable based on the mortgage terms and current rates. The rate is one of the key factors for borrowers when seeking home financing options since it’ll affect their monthly payments and how much they’ll pay throughout the lifetime of the loan.
Mortgage rates are set based on a few factors, economic forces being one of them. For instance, lenders look at the prime rate—the lowest rate banks offer for loans—which typically follows trends set by the Federal Reserve’s federal funds rate. It’s usually a few percentage points.
The 10-year Treasury bond yield can also reveal market trends. If the bond yield goes up, mortgage rates tend to go up, and vice versa. The 10-year Treasury yield is usually the best standard to judge mortgage rates. That’s because many mortgages are refinanced or paid off after 10 years even if the norm is a 30-year loan.
Factors that the borrower can control is their credit score and down payment amount. Since lenders determine rates based on the risk they may take, borrowers who are less creditworthy or have a lower down payment amount may be quoted higher rates. In other words, the lower the risk, the lower the rate for the borrower.
While the Federal Reserve doesn’t decide mortgage rates, it does influence the rate indirectly. The Federal Reserve helps to guide the economy by keeping inflation under control and encouraging growth. That means the decisions the Federal Open Market Committee makes in raising or lowering short-term interest rates may influence lenders to raise or lower theirs.
Mortgage rates can be different depending on the type. For instance, fixed-rate mortgages tend to be higher than adjustable-rate ones. However, adjustable-rate mortgages tend to have lower rates during a predetermined time, then fluctuates as it adjusts to current market conditions.
Interest rates and APR are not the same. An annual percentage rate (APR) reflects additional charges associated with your mortgage, which includes the interest. The interest rate reflects the cost homeowners pay to borrow money. These fees include charges such as origination fees and discount points, which is why the APR is typically higher than the interest rate.
Also known as discount points, this is a one-time fee or prepaid interest borrowers purchase to lower the interest rate for their mortgage. Each discount point costs 1% of your mortgage amount, or $1,000 for every $100,000 and will lower the rate by a quarter of a percent, or 0.25. For example, if the interest rate is 4%, purchasing one mortgage point will reduce the rate to 3.75%.
The minimum you’ll need to put down will depend on the type of mortgage. Many lenders require a minimum of 5% to 20%, whereas others like government-backed ones require at least 3.5%. The VA loan is the exception with no down payment requirements.1
Generally, the higher your down payment, the lower your rate may be. Homeowners who put down at least 20% will be able to save the most.
In order to assess mortgage rates, we first needed to create a credit profile. This profile included a credit score ranging from 700 to 760 with a property loan-to-value ratio (LTV) of 80%. With this profile, we averaged the lowest rates offered by more than 200 of the nation’s top lenders. As such, these rates are representative of what real consumers will see when shopping for a mortgage.
The same credit profile was used for the best state rates map. We then found the lowest rate currently offered by a surveyed lender in that state.
Keep in mind that mortgage rates may change daily and this data is intended to be for informational purposes only. A person’s personal credit and income profile will be the deciding factors in what loan rates and terms they are able to get. Loan rates do not include amounts for taxes or insurance premiums and individual lender terms will apply.