An interest rate is the percentage of your existing principal loan balance you pay your lender in exchange for borrowing money to purchase a home. The interest rate is used to calculate your monthly mortgage payment. The higher the interest rate, the higher your monthly payment will be.
How Do Mortgage Interest Rates Work?
Interests rates change depending on the current economy and investment activity. Fannie Mae and Freddie Mac bundle mortgage loans and sell them to investors. The rate that those investors are willing to pay for mortgages determines what rates that lenders can set on their loans. There are two types of interest rates:
Fixed Rate Mortgage
This is the most common type of rate that homebuyers choose. A fixed rate mortgage stays the same throughout the life of your loan no matter what the current market rate is. There are 10, 15, 25, and 30-year fixed mortgages available.
Adjustable Rate Mortgage (ARM)
This loan gives you a lower, fixed interest rate for the initial 5-10 years and then may change annually based on the current interest rate.
When do mortgage rates decrease?
- The stock market falls
- There are dips in foreign markets
- Inflation slows down
- Unemployment increases
- Jobs decrease
When do mortgage rates increase?
- The stock market is strong
- Foreign markets are stable
- Inflation is high
- Unemployment is low
- Jobs are increasing
Do Mortgage Interest Rates Impact the Market?
Mortgage rates do not directly impact the prices of homes but they do influence housing supply – which indirectly plays a role in pricing. When mortgage rates go up, homeowners are less likely to put their houses on the market. This creates a lower supply of homes, increased prices, and higher demands. When rates are low, more homeowners are more comfortable selling their properties, which increases inventory and puts the market in the buyers favor.
How to Get the Best Possible Interest Rate?
Rates vary by lender so it is important to shop around before committing. In addition to the going market rate, your interest rate will also depend on your current financial situation, including:
- Your credit score
- Repayment history
- Income and employment history
- Existing debt
- Cash and assets
- Size of your down payment
- Property location
- Loan type, term, and amount
Interest rates are higher based on how risky of a borrower you are. The more money you borrow and the state of your finances will determine your rate.