What is a mortgage rate?

A mortgage rate is the rate of interest that is charged by the lender when you take out a mortgage. If you borrow money to buy a house, you are expected to pay the lender more than what you borrow, in return for the benefit of using the lender’s money. How much more you pay on top of what you borrow is called interest and it is decided by the mortgage rate. Mortgage rates can be different for different people depending on their financial situation. Lenders usually adjust the best interest rate they can offer to reflect the riskiness of a borrower. The mortgage rate adjustment is called Loan Level Price Adjustment, and it helps lenders provide more loans to different borrowers.

There are two types of mortgage rates:

Fixed Mortgage Rates

• Stay unchanged for a specific period of time
• Are usually slightly higher than adjustable interest rates
• Provide you with more certainty in terms of how much you will pay monthly

Adjustable Mortgage Rates

• Fluctuate as they are based on a benchmark index, such as the Prime rate
• Are usually lower than fixed mortgage rates initially

What affects my mortgage rate?

Mortgage rates are generally determined by:

1. Market economic factors such as the rate of economic growth
2. The borrower’s personal financial attributes, such as their credit score

There is not much one can do about the economic factors as they are out of our control, however, one can increase their creditworthiness to get a lower mortgage rate. The lender offers lower rates to borrowers who prove to be less likely to default on their loan and this likelihood is determined by factors such as their Loan-to-value ratio, their credit score, their debt-to-income ratio, and more.

How long is a mortgage rate locked for?

A mortgage rate lock is an agreement between the lender and the borrower where the lender agrees to keep the mortgage rate fixed for a period of time. With interest rates changing continuously, this agreement serves as a guarantee the lender provides to keep your interest rate unchanged until a certain date. How long a mortgage rate stays locked for typically varies by lender. However, this period is usually 30 to 45 days free of charge for most lenders.

Which lender offers the best mortgage rates?

While the first thing most borrowers look for is low mortgage rates, lenders should not only be compared by this standard. Sometimes, a lender might offer lower rates, but higher origination and closing costs. This means that when looking for a lender, you need to take other things into account apart from their mortgage rates. The Annual Percentage Rate can be a more accurate point of comparison as it includes other fees that add to the cost of the loan.

How does the Fed rate affect mortgage rates?

The Fed rate affects the mortgage rates indirectly. Adjustable interest rates tend to move in the same direction as the Fed rate. When the Fed rate increases, it causes the mortgage rate to increase as well and vice versa. However, the mortgage rate won’t always lag behind changes in the Fed rate. Mortgage lenders can often increase mortgage rates in anticipation of expected increases in the Fed rate. It is important to note that fixed interest rates are generally not affected by the movements in the Fed rate. They typically follow the 10-year Treasury yield.

Will mortgage rates go up?

With the recovery of the economy from the COVID-19 pandemic, it is expected for mortgage rates to go up. The bigger the overall growth of the U.S. economy in terms of jobs, consumer spending, etc., the higher the interest rates will go.

Among other factors, mortgage rates have been low so far because of the monetary policy from the Federal Open Market Committee (FOMC). The FOMC has kept interest rates low by having a Fed rate benchmark of 0% and by investing billions of dollars in Mortgage-Backed Securities (MBS).

Should I Get a 30-year or 15-year Mortgage?

Most homebuyers choose to go with the 30-year mortgage term because of the lower monthly mortgage payments that it offers. Some homebuyers choose a 15-year mortgage term because they don’t want to pay a lot in interest over time. Depending on your specific financial situation and future goals, one or the other can prove to be more beneficial.

Can I deduct my mortgage payments from my income tax?

Yes, you can deduct the interest of your mortgage payments if you itemize your deductions. This means that when you file your income tax, you can include mortgage interest payments as expenses during the year, which will lower your net annual income and will in turn lower your tax liability. Discount points purchased can also be included in this in the year in which you pay for them. However, if you choose to take standard deductions you will not be able to deduct your interest.

What credit score do I need to get a mortgage?

The required credit score largely depends on the type of mortgage you are applying for. For a typical conventional mortgage, the credit score required is at least 620. However, jumbo loans usually require a higher credit score of 700 to account for the risk of lending above the limit of $822,375. Non-conventional mortgages, on the other hand, have lower credit score requirements. FHA-lenders ask for a credit score of 500 for a minimum down payment of 10% and a credit score of 580 for a minimum down payment of 3.5%. VA loans and USDA loans have no minimum credit score requirements.

How much can I borrow for a mortgage?

Generally, how much you can borrow will depend on several factors such as your income, your mortgage term, current monthly debt payments, and type of loan. These and other factors will determine how much a lender will be willing to lend you. However, the real question is not how much you can borrow but rather how much you can afford.

Factors that affect your borrowing limit:

• Credit History → Lenders will check your credit history to determine how reliable you are in paying back debts. Good credit history will have a positive impact on your borrowing capacity..
• Debt-to-Income Ratio → A lower DTI ratio leaves more room for borrowing. Your DTI ratio is determined by your income and the monthly payments you have to make to cover other debts such as student loans, car loans, and any minimum credit card payments.
• Down Payment → The amount you put down affects your Loan-to-Value ratio. The bigger the down payment, the lower your LTV ratio. A low LTV ratio indicates that you are a less risky borrower which has a positive effect on how much lenders are willing to lend you..
• Loan Type → Conforming loans have a borrowing limit that depends on the county you are located in. To borrow an amount above the limit, you would have to apply for a jumbo loan.

What is a discount point?

A discount point is a form of prepaid interest available to the borrowers for a certain fee. Basically, a borrower can purchase discount points to reduce the interest rate on their mortgage. One discount point usually costs 1% of the whole loan amount. Thus, if you have a loan of $300,000, one discount point would cost you $3,000. Typically, one discount point will reduce your mortgage rate by approximately 0.125% to 0.25% depending on the lender, the type of loan, and current interest rates.

How can I get a mortgage pre-approval?

To get a mortgage pre-approval, you basically have to apply for a mortgage. In order to get pre-approved, you will need to submit a number of documents to the lender so they can assess your income and ability to pay back the loan. These documents will provide information on:

• Identification
• Employment verification
• Proof of income
• Proof of assets
• Credit history
• Debt-to-income ratio

The mortgage pre-approval letter usually expires in 60-90 days, therefore, if you haven’t decided on a home yet, you might need to get a renewal of your mortgage pre-approval. You can get a renewal by providing your lender with your latest financial and credit information.

When Should I Refinance?

Most people choose to refinance their mortgages in order to take advantage of lower mortgage rates. However, there are several other reasons why someone would choose to refinance their mortgages, such as to convert from an ARM to a Fixed-rate Mortgage, change the loan term, remove their mortgage insurance or tap into their home’s equity through a cash-out refinance.

1. Lower mortgage rates - When current interest rates are low, and you are stuck in a higher interest rate loan agreement, you might consider refinancing your loan to lower the interest rate. This can make a huge difference in your future monthly payments.
2. Converting from ARM to Fixed rate - When you have reason to believe that interest rates are going to increase in the near future, you might find it beneficial to switch from an adjustable mortgage rates to a fixed-rate mortgage through a refinance.
3. Changing the loan term - If you currently have a 15-year mortgage and are noticing that you cannot afford its large monthly mortgage payments, you can choose to convert to a 30-year mortgage. On the other hand, if you want to pay less in interest overall and have the necessary funds, you can convert from a 30-year mortgage to a 15-year one.
4. Removing mortgage insurance - The only way that you can remove the mortgage insurance for an FHA loan is through a mortgage refinance. Therefore, when you reach 20% equity in your home with an FHA loan, it would be a good idea to refinance. On the contrary, you can simply stop paying your private mortgage insurance for conventional loans, when you reach a Loan-to-Value ratio of 78%.
5. Cash-out Refinance - A cash-out refinance allows you to borrow from your home-equity using a new larger mortgage. How much more you can borrow depends on how much home equity you own at the time.