Mortgage Rates

How Much Can You Save

You’ve learned a lot so far. At the end of it all, you’re likely still looking to lower that monthly payment. There are two options. Earn favorable adjustments by being a less risky borrower, or pay for discount points upfront.

Loan officers and lenders prefer less risk. If that’s you, you will earn an adjustment on the lender’s going rate, called the par rate, saving you money. Adjustments work both ways, meaning you’ll have a slightly higher rate to offset the lender’s risk in some situations. Here’s what matters:

loan amount

Loan Amount

A conforming loan can save money. Prepare for a higher interest rate for a jumbo loan above the pricing limit. Loans over $1 million carry more risk, so expect a notable adjustment here if you’re buying a high-priced home.

loan to value

Loan-to-Value

The ratio of your loan to the home’s value is a pricing adjustment factor. The more you put down, the more you shift the burden away from the lender. This can help your rate.

credit score

Credit Score

One place your rate can be helped or hurt is your credit score. A FICO score of 740+ will generally qualify for pricing rebates. 680–739 is considered normal and does not help or hurt. Below 680 is when you can expect a higher rate.

occupancy

Occupancy

Planning on living in your new home full time? You saved yourself money! Buying property as a second home, vacation home, or investment property may add a notable rate increase.

property type

Property Type

Buying a single-family home? You won’t see an increase for choosing this type of property. Condos and multi-family homes, however, tend to earn pricing hits that can up your rate.

loan purpose

Loan Purpose

Purchasing a new home will usually get you a rebate or adjustment, while refinancing for a better term or rate typically has no cost. Cash-out refis earn a pricing hit, however.

Mortgage Discount Points

The nice thing about pricing adjustments is that you can influence your rate without handing extra money to your lender — though you may need to make a larger down payment or pay down credit card balances. With mortgage discount points, you are buying yourself a lower rate by paying more upfront.

A discount point is an additional percentage of your loan amount you agree to pay at closing to lower your interest rate. Each lender’s ratio varies, but generally it’s a fraction of a percent off your rate. Whether the added upfront cost is worth it, or financially feasible, is an individual decision. If you plan to move or refinance in a few year, it might be wise to take a higher rate and skip the points.

Calculating Monthly Payments

You already know your mortgage rate is important — a higher rate means a higher total amount paid over the course of the loan — but that same mortgage rate can really impact your monthly payment.

Basic Variables

When you’re calculating your monthly payments, you need the following to get started:

  • Sale price
  • Loan amount or down payment
  • Interest rate

The sale price, or list price, will be the total price of the home. If you’re considering making an offer, use that figure.

The payment calculator needs to know how much of that value will be financed through a lender. The third puzzle piece is your hypothetical interest rate (not APR).

Variables Affect Payments

Now that you have a baseline for a monthly payment, start playing with these variables to see how they affect the payment.

  • A higher down payment or lower loan amount
  • Lower interest rate

What’s interesting to note is that a higher sale price does not always equal a higher monthly payment, and a higher loan amount also does not necessarily equal a higher monthly payment.

For example, a $350,000 house with 20% down can snag a great rate of 3.7%. Your monthly payment would be $1,297. Let’s say that total price is too high and you aim for $300,000 with 20% down, but rates have risen and your rate is 5.5% for a monthly payment of $1,363.

Other Variables

The bulk of your monthly payment will be the principal and interest you’ve calculated. There are other fees, though:

  • Property taxes
  • Homeowners insurance
  • Private mortgage insurance

Planning on living in a neighborhood with a homeowners association? Add in HOA fees and a maintenance fund. Not all costs will be part of your all-in-one mortgage payment, but they still must be covered.

Whatever your loan choice, make sure you’re comfortable with that monthly payment — you’ll be making it for some time.

Where Do Rates Come From?

Where do mortgage rates come from? Like many mortgage lending things, it’s complicated enough. Let’s take a basic tour:

Interest Rate or APR

Mortgage interest rates come in eighths of a point. That means the interest rate between three and four percent should look like:

  • 3%
  • 3.125%
  • 3.25%
  • 3.375%
  • 3.5%
  • 3.625%
  • 3.875%
  • 4%

That’s it. All rates will follow this formula. You’ve probably thought about that time you saw ads for 3.36% and 3.99%. They don’t follow the pattern.

In the case of the loan ads, what you’re seeing is the lender’s annual percentage rate (APR). That is your rate with discount points, closing costs, origination fees, and other costs. For the survey, you’re looking at an average of thousands of rates offered to thousands of borrowers.

Stocks, Bonds, and Securities

This is the part where things get complicated.

There’s a type of government bond called the 10-year Treasury bond. When stock market investors are looking for a safe, medium-term investment, they might buy these.

Fixed-rate, 30-year mortgages are often packaged up and sold on to a secondary market as mortgage-backed securities (MBS). The same investors might also buy these.

Even though the mortgages are 30-year loans, the average loan gets paid off (when a home is re-sold) or refinanced within about 10 years. That makes these bonds and mortgage-backed securities similar financial products that compete in the same market.

Because of this similarity and because there’s a strong correlation between 10-year Treasury bond yields and mortgage interest rates, experts monitor both.

So, what makes bond prices and interest rates go up or down then?

It’s the Economy

Turns out the economy has a pretty sizable impact on both bonds and mortgages rates. Reports on home sales, employment, consumer confidence, and more, give insight into the health of the economy and can easily send rates up or down depending on the news.

When the economy isn’t doing so well, investors tend to sell their stocks and look for safer investments, like 10-year Treasury bonds. When these bonds get bought up, their prices may go up but their yield (think investment return) goes south. Yield down? Mortgage rates down.

When the economy starts to take off, investors know they can make more money in stocks, so they forget about bonds for a minute, which makes prices go down and yields go up. Yield up? Mortgage rates up.

Other Forces That Influence

Of course, there are a number of other factors that heavily influence your interest rate, as well. Supply and demand, timing, and pricing adjustments can all have a big impact.

The key to remember is that mortgage rates are closely linked to a number of other parts of the economy. If economic data starts shifting, you can bet interest rates aren’t far behind.

Confused? We can break it down for you.

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