A home is one of the biggest purchases you’ll ever make. Current mortgage rates are significantly higher than they were a year ago. You can save thousands of dollars simply by paying attention to the interest rate on your loan.
To land the best mortgage deal for you, it’s important to shop around and compare quotes with multiple lenders. Check out the most recent mortgage rates and get personalized quotes as well as a full rundown of your estimated monthly payment.
What is a mortgage rate?
A mortgage rate is the interest rate you pay on the money you borrow to buy property. Mortgage rates are expressed as a percentage, and they represent the annual cost of the loan. However, mortgage interest isn’t calculated annually — it’s usually calculated monthly. You can find out your monthly mortgage rate by dividing your mortgage rate by 12.
On a fixed-rate mortgage, the mortgage rate never changes. If you have an adjustable-rate mortgage, your interest rate can change after every adjustment period.
Here’s how your mortgage rate works.
Let’s say you get a mortgage for $100,000, and your mortgage rate is 4%. At the end of the first month, your lender charges interest equal to 0.333% (your 4% mortgage rate divided by 12) of your outstanding balance. In this example, that’s $333.33.
If this is a 30-year fixed-rate mortgage, your lender has figured that you need to pay $477 per month to be free and clear at the end of the loan term. For the first month, then, your $477 payment covers $333.33 in interest, and $143.67 goes toward the $100,000 balance.
Now you owe $99,856.33. Since your balance is lower, the interest charge is also a little lower. In the second month, your $477 payment covers $332.85 in interest plus $144.15 towards the balance.
In this way, you make a little more progress against your principal balance each month over the life of the loan.
What is a mortgage?
A mortgage is a secured loan that uses property as collateral. Most people who buy a home take out a mortgage to do so. You can also use a mortgage to get cash from a lender if you already have equity in a piece of property.
A mortgage is technically only the loan, but other costs might be included in your monthly payment. Many people make a single payment that covers their loan payment, property taxes, homeowners association dues, homeowners insurance, and mortgage insurance.
Mortgages are different from other loans in that they usually cost less than other loans, and the interest may be tax deductible.
How the history of mortgage rates affects home affordability
When interest rates are high, you get less home for your money. When rates are low, you can shop in a higher price range. In the 1970s, mortgage rates rose from 7% to more than 10%. In the 1980s, rates continued to climb, reaching higher than 18%.
The history of mortgage rates can show you how rate fluctuations affect home affordability. Here’s what a home loan payment looks like at different interest rates:
If your housing budget was $1,000, you would not have been able to borrow $100,000 in the early 1980s. Today you can get a mortgage rate of 3% or even lower. At 3%, the payment on this loan is just $422. So if you can afford $1,000 a month, you could borrow $240,000.
What is a good mortgage rate?
Whether a mortgage rate is good largely depends on context. Today, people who remember the 18% mortgage rates of the 1980s — or even an 8% rate — would probably say 5% is a good mortgage rate. Someone who bought a home last year at 2.5% might not think 5% is a good rate today.
A better measure to consider when you are ready to borrow may be today’s best mortgage rate. Get your credit score above the threshold for the lowest possible rate (usually 720, but sometimes 740). Save enough money to cover closing costs, moving expenses, and at least 5% down. Excellent credit, sufficient equity, and sufficient cash on-hand are the three main factors that can drive your mortgage interest rate down.
How can I find the best mortgage rate?
You can find the best mortgage rate by shopping around. In fact, the more lenders you compare, the more you may save on interest rates and fees. First-time home buyers may find lower rates than those typically offered by lenders. In addition, state and local governments often offer programs to support first-time home buyers. Talk to your local housing authority to learn more about your options.
Shopping around is just one way to find a low rate. Rates vary based on the type of loan you want, your down payment size, and your credit score. Each of these factors into your mortgage application and influences the rates available to you. If you’re not finding the rates you expect, try looking at other types of loans, offering a larger down payment, or boosting your credit score.
For example, when looking at mortgages, you’ll need to decide if you want an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. ARMs usually offer lower introductory rates. However, those rates usually increase after a time. A fixed-rate loan tends to offer a slightly higher interest rate — but that rate is fixed for the duration of your loan.
How much can you afford to borrow for a home?
To figure out how much you can afford to borrow to buy a home, look at your income and your debts. The more debt you have, the less money at your disposal for a housing payment. It’s in your best interest to knock down debt as much as possible if you want to maximize your home-buying budget.
Add up all of your debt payments each month. Include any payment that you are required to make each month, such as:
- Car loan
- Personal loan
- Student loan
- Credit card minimum payments
- Timeshare fees
- Child support
- Alimony
The minimum payment for any loan you cosigned, even if you are not the one who normally makes the payment (lenders count these payments)
Ideally, you want these payments to total no more than about 28% of your before-tax income. You can afford a mortgage payment that brings your total debt up to about 36% of your before-tax income. A mortgage calculator can help you figure out the loan amount for the payment that works for you. But note that your actual monthly mortgage payment will probably also include property taxes, homeowners insurance, mortgage insurance, and HOA fees. So you might not be able to borrow as much as a calculator shows you.
Also, you’ll have to take an educated guess at the interest rate based on your credit score. You’ll get a customized interest rate from a lender after you apply.
