Mortgage industry insights
Will mortgage rates follow the Fed?
Mortgage rates have been on an upward track so far this year, but that path might change as the Federal Reserve continues to battle inflation, increasing the federal funds rate again in July.
“The Fed has raised interest rates as much in little more than four months as what took three years the last time they moved rates up,” says Greg McBride, chief financial analyst for Bankrate. “The cumulative effect of this sharp rise in rates has cooled the housing market and caused the economy to start slowing, but hasn’t done much to lower inflation.”
Fed policy doesn’t influence rates on fixed mortgages — they follow the 10-year Treasury yield. However, the central bank’s moves could drive those yields down and pile on the recession woes.
If that happens, fixed mortgage rates might pull back from the near-6 percent range we’ve seen as of late.
Though the Fed doesn’t set fixed mortgage rates, its actions do affect adjustable-rate mortgages (ARMs) and home equity products. Each time the central bank raises its key rate, variable home loan rates move in-step.
The swift uptrend in mortgage rates has been weighing on home sales during what would historically be an active spring and summer homebuying season. As of June, sales have come in lower five months in a row, the National Association of Realtors reports.
The housing market is showing further signs of cooling as appreciation slows, though prices are still posting double-digit gains for now, according to CoreLogic’s price index. There’s been some movement on the inventory front, and builders are busy breaking ground on more homes. At this point, it’s unclear what effect a recession might have given the job market remains relatively healthy.
Still, for buyers, a slowdown would bring much-needed relief after the pandemic home-shopping frenzy.
Whatever type of mortgage you’re looking for, in this environment, it’s more important than ever to compare rates before selecting a lender.
“Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” says McBride.
Read more: This week’s latest mortgage news
3-month trend30-Year Fixed Rates15-Year Fixed Rates10-Year Fixed Rates5/1 ARM Rates7/29/20225.57phần trăm4.82phần trăm4.80phần trăm4.18phần trăm7/22/20225.84phần trăm5.00phần trăm5.00phần trăm4.26phần trăm7/15/20225.73phần trăm4.89phần trăm4.84phần trăm4.21phần trăm7/8/20225.67phần trăm4.87phần trăm4.86phần trăm4.27phần trăm7/1/20225.83phần trăm5.06phần trăm5.04phần trăm4.29phần trăm6/24/20225.89phần trăm5.10phần trăm5.21phần trăm4.26phần trăm6/17/20225.91phần trăm5.11phần trăm5.18phần trăm4.02phần trăm6/10/20225.54phần trăm4.75phần trăm4.67phần trăm3.91phần trăm6/3/20225.46phần trăm4.69phần trăm4.57phần trăm3.90phần trăm5/27/20225.28phần trăm4.60phần trăm4.50phần trăm3.91phần trăm5/20/20225.48phần trăm4.74phần trăm4.74phần trăm3.87phần trăm5/13/20225.57phần trăm4.81phần trăm4.78phần trăm3.85phần trăm5/6/20225.48phần trăm4.73phần trăm4.81phần trăm3.78phần trăm4/29/20225.42phần trăm4.69phần trăm4.66phần trăm3.56phần trăm4/22/20225.25phần trăm4.46phần trăm4.54phần trăm3.48phần trăm4/15/20225.06phần trăm4.35phần trăm4.44phần trăm3.41phần trăm4/8/20224.83phần trăm4.09phần trăm4.04phần trăm3.26phần trăm4/1/20224.88phần trăm4.08phần trăm3.98phần trăm3.17%
>> Read more: Bankrate's weekly mortgage rate trend predictions from industry experts
The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, like savings accounts and CD rates. However, the Fed does set borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate. The federal funds rate can have a knock-on effect on 10-year Treasury bond yields, which is what most mortgage rates are tied to. Basically, the Fed does not directly set mortgage rates, but its policies can influence the financial markets and movers that do.
>> Read more: How the Federal Reserve affects mortgage rates
How to get a mortgage
Because a home is usually the biggest purchase a person makes, a mortgage is usually a household’s largest chunk of debt. Getting the best possible terms on your loan can mean a difference of hundreds of extra dollars in or out of your budget each month, and tens of thousands of dollars in or out of your pocket over the life of the loan. It's important to prepare for the mortgage application process to ensure you get the best rate and monthly payments within your budget.
Here are quick steps to prepare for a mortgage:
- Build your credit
- Make a budget
- Set savings aside for both down payment and expected monthly payments
- Research the best type of mortgage for you
- Compare current mortgage rates
- Choose the right lender
- Get preapproved
- See multiple houses within your budget
- Apply and get approved for a mortgage
- Close on your new house
>> Read more: How to get a mortgage guide
Why compare mortgage rates?
Shopping around for quotes from multiple lenders is one of Bankrate’s most crucial pieces of advice for every mortgage applicant. When you shop, it’s important to think about not just the interest rate you’re being quoted, but also all the other terms of the loan. Be sure to compare APRs, which include many additional costs of the mortgage not shown in the interest rate. Keep in mind that some institutions may have lower closing costs than others, or your current bank may extend you a special offer. There’s always some variability between lenders on both rates and terms, so make sure you understand the full picture of each offer, and think about what will suit your situation best. Comparison-shopping on Bankrate is especially smart, because our relationships with lenders can help you get special low rates.
Step 1: Determine what mortgage is right for you
When finding current mortgage rates, the first step is to decide what type of mortgage best suits your goals and budget. Consider your credit score and down payment, how long you plan to stay in the home, how much you can afford in monthly payments and whether you have the risk tolerance for a variable-rate loan versus a fixed-rate loan.
>> Read more: Types of mortgages
Step 2: Compare mortgage rates
Once you decide which mortgage type fits your needs, you can begin comparing current mortgage options. There’s only one way to be sure you’re getting the best available rate, and that’s to shop at least three lenders, including large banks, credit unions and online lenders, or by using a mortgage broker. Bankrate offers a mortgage rates comparison tool to help you find the right rate from a variety of lenders.
Keep in mind that mortgage rates change daily, even hourly, based on market conditions, and can vary by loan type and term. To ensure you’re getting accurate rate quotes, compare loan estimates based on the same term and product, and aim to get your quotes all on the same day.
Step 3: Choose the best mortgage offer
Bankrate’s mortgage calculator can help you estimate your monthly mortgage payment, which can be useful as you consider your budget. Look at the APR, not just the interest rate. The APR is the total cost of the loan, including the interest rate and other fees. Some lenders might have the same interest rate but different APRs, which means you’ll be charged different fees.
Mortgage lenders come in all shapes and sizes, from online companies to brick-and-mortar banks — and some are a mix of both. Decide what type of service and access you want from a lender and balance that with how competitive their rates are. You might decide that getting the lowest rate is the most important factor for you, while others might go with a slightly higher rate because they can apply in person, for example. Some banks offer discounts to existing customers, so you might be able to save money by getting a loan where your savings tài khoản or checking tài khoản is.
If your credit is a bit tarnished, many lenders offer loans with lower down payment and credit requirements through the FHA. Veterans might find VA mortgages especially attractive.
>> Read more: How to find the best mortgage lender
What factors determine my mortgage rate?
Lenders consider these factors when pricing your interest rate:
- Credit score
- Down payment
- Property location
- Loan amount/closing costs
- Loan type
- Loan term
- Interest rate type
Your credit score is the most important driver of your mortgage rate. Lenders have settled on this three-digit score as the most reliable predictor of whether you’ll make prompt payments. The higher your score, the less risk you pose in the lender’s view — and the lower rate you’ll pay.
Lenders also consider how much you’re putting down. The greater share of the home’s total value you pay upfront, the more favorably they view your application. The kind of mortgage you choose can affect your rate, too, with shorter-term loans like 15-year mortgages typically having lower rates compared to 30-year ones.
Lenders reserve their most competitive rates to borrowers with excellent credit scores — usually 740 or higher. However, you don’t need spotless credit to qualify for a mortgage. Loans insured by the Federal Housing Administration, or FHA, have a minimum credit score requirement of 580, although you’ll probably need a score of 620 or higher to qualify with most lenders. (While FHA loans offer competitive rates, the fees are steep.)
To score the best deal, work to boost your credit score above 740. While you can get a mortgage with poor or bad credit, your interest rate and terms may not be as favorable.
>> Read more: Credit score needed to buy a house
The difference between APR and interest rate is that the APR (annual percentage rate) is the total cost of the loan including interest rate and all fees. The interest rate is just the amount of interest the lender will charge you for the loan, not including any of the administrative costs. By capturing points and fees, the APR is a more accurate picture of how much the loan will cost you, and allows you to compare loan offers with differing interest rates and fees.
Here’s what may be included in the APR:
- Interest rate – This is simply the percentage rate paid over the life of the loan.
- Points – This is an upfront fee the borrower can opt to pay to lower the interest rate of the loan. Each point, which is also known as a discount point, costs 1 percent of the mortgage amount. So, one point on a $300,000 mortgage would cost $3,000 upfront.
- Mortgage broker fees – Brokers can help borrowers find a better rate and terms, but their services must be paid for when the loan closes. This cost is shown in the APR and can vary. The broker's commission typically ranges from 0.50 percent to 2.75 percent of the loan principal.
- Some closing costs, including loan origination fees – but title insurance and prepaid items are not included, and these costs are considerable. Closing costs typically range from about 2 to 5 percent of the loan amount.
>> Read more: APR vs. interest rate
FAQs about mortgage interest rates
A mortgage is a type of loan designed for buying a home. Mortgage loans allow buyers to break up their payments over a set number of years, paying an agreed amount of interest. Mortgages are also legal documents that allow the mortgage holder to (re)claim the property if the buyer doesn’t make their payments. It also protects the buyer by forbidding the mortgage holder from taking the property while regular payments are being made. In this way, mortgages protect both the mortgage holder and the buyer.
>> Read more: What is a mortgage?
A mortgage rate lock freezes the interest rate. The lender guarantees (with a few exceptions) that the mortgage rate offered to a borrower will remain available to that borrower for a stated period of time. With a lock, the borrower doesn’t have to worry if rates go up between the time they submit an offer and when they close on the home.
When should I lock my mortgage rate?
Most lenders offer a 30- to 45-day rate lock free of charge. This means if the interest rate increases before your loan closes, you get the stated rate. However, if rates fall, you won’t benefit unless you restart the loan process, a costly and time-consuming endeavor.
Although some lenders offer a free rate lock for a specified period, after that period they may charge fees for extending the lock.
>> Read more: When should you lock your mortgage rate?
Homeownership is synonymous with the American Dream, but the housing boom has pushed this goal out of reach of many. Some of the advantages and disadvantages of homeownership:
- A home is a powerful way to build wealth over time.
- Homeownership provides the certainty of knowing where you’ll live from one year to the next.
- With a fixed-rate mortgage, you know your principal and interest costs won’t change. A landlord can boost your rent when your lease is up.
- Homeownership is expensive, prohibitively so in some markets.
- Maintenance and repairs are a constant — and costly — reality for homeowners.
- As home values rise, so do insurance premiums and property taxes.
>> Read more: Renting vs. buying a home
Mortgage points, also referred to as discount points, help homebuyers reduce their monthly mortgage payments and interest rates. A mortgage point is most often paid before the start of the loan period, usually during the closing process. It's a type of prepaid interest made on the loan. Each mortgage point typically lowers an interest rate by 0.25 percentage points. For example, one point would lower a mortgage rate of 3 percent to 2.75 percent.
The cost of a point depends on the value of the borrowed money, but it's generally 1 percent of the total amount borrowed to buy the home.
Buying points upfront can help you save money in interest over the life of your loan, but doing so also raises your closing costs. It can make sense for buyers with more disposable cash, but if high closing costs will prevent you from securing your loan, buying points might not be the right move.
>> Read more: What are mortgage points?
Looking to refinance?
Refinancing your mortgage can be a good financial move if you lock in a lower rate. However, there are upfront costs associated with refinancing, such as appraisals, underwriting fees and taxes, so you’ll want to be sure the savings outpace the refinance price tag in a reasonable amount of time — most experts say the ideal breakeven timeline is 18 to 24 months.
As mortgage rates rise, fewer homeowners will stand to benefit from refinancing, but even at their current level, millions of borrowers could still save.
Reducing your rate isn’t the only reason to refinance. It’s also possible to tap your home equity to pay for home renovation, or, if you want to pay down your mortgage more quickly, you can shorten your term to 20, 15 or even 10 years. Because home values have risen sharply in the last few years, it’s also possible that a refinance could free you from paying for private mortgage insurance.
>> Compare refinance rates
>> Read more: Information on mortgage refinancing
Written by: Jeff Ostrowski, senior mortgage reporter for Bankrate
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Read more from Jeff Ostrowski
Reviewed by: Greg McBride, chief financial analyst for Bankrate
Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience.
Read more from Greg McBride