Friday, 6 September 2019

Once you're in the market for a home, you'll probably be bombarded with messages about mortgage rates: “Lowest they've ever been!" or “Lock in before rates go up!"

If it seems like rates go up and down every day, you're right. They do. Sometimes multiple times a day.

In the 1970s mortgage interest rates hovered in the 7 percent range and steadily increased, topping out at a whopping 18.45 percent in October 1981 for a 30-year fixed rate mortgage. The '80s saw mostly double-digit interest rates, and it wasn't until the 2000s we saw rates down under 6 percent. Today, rates are mostly in the 3 to 5 percent range.

Why so much fluctuation? Well, it's complicated. For starters, rates are determined by a combination of market forces, including:

  • The economy: During a strong economic period, rates often go up, as capital is in demand. Conversely, during slower economic times, rates go down, making money more affordable and hopefully sparking economic growth. In addition to natural economic fluctuations, rates are impacted by the Consumer Price Index, the Producer Price Index, and the real estate market. Lenders also analyze economic data to try to forecast potential economic growth and contraction, and set rates accordingly. 
  • Federal Reserve activity and inflation: In order to keep inflation in check, the Federal Reserve controls the amount of money flowing through the economy by raising and lowering interest rates, and injecting more cash when necessary by buying Treasury bonds. More money in the system lowers interest rates and again, hopefully encourages economic activity.
  • World events: Economies become volatile when regimes change, fuel prices go way up or down, and when the United States' trade is impacted by any number of domestic and international forces. This can affect investor confidence, in turn, sparking changes in interest rates.

How changing rates affect buyers

Because mortgages are such big dollar amounts — the Mortgage Bankers Association reported the average loan request in March 2017 hit an all-time high at $313,300 — even a fraction of a percentage point can make a big difference in your monthly payment and how much you will spend on your home in the long run.

As an example, consider a home priced at $600,000 with the buyer putting $120,000 down. A 4 percent 30-year, fixed-rate mortgage would cost $91,644 in interest for the first five years, and a total of $344,974 over the full 30 years.

At 5 percent, the same loan amount would cost the borrower $115,383 in the first five years (a difference of $23,739) and $447,628 over the life of the loan (a difference of $102,654).

Most lenders offer 15-year mortgages with slightly lower interest rates, but because the payoff time is cut in half, the monthly payment is higher.

Want to run some numbers? Check out mortgage calculators to estimate how much you can afford to borrow, your monthly payment, your closing costs, and more. You can also explore the pros and cons of renting vs. buying.

How to get a better rate

While interest rates are ultimately controlled by financial and governmental institutions, the Consumer Financial Protection Bureau says there are steps consumers can take to get the best possible rate on their mortgage.

  • Check your credit report and correct any errors.
  • Shop around to get loan estimates from at least three different lenders, carefully comparing everything from the rate to estimated closing costs.
  • Negotiate with your lender. If you have good credit, you do have some leverage.
  • Put 20 percent down. Depending on your credit scores, putting down the full 20 percent can get you a lower rate and save you a bundle of interest in the long run.
  • Buy points. When you are getting your mortgage, some lenders give you the option of paying money up front to lower your interest rate. Often called discount points, you'll typically pay 1 percent of your total mortgage to lower your rate by one point. 
  • Lock in on Monday. When you get a mortgage quote, you can lock in the rate with your lender for a certain number of days, typically 30, 45, 60, or 90 days. This means you will get the agreed-upon rate if you purchase a home during the lock period, even if interest rates change. Mortgage expert Dan Green says on Mondays rates are generally more stable and it's easier to lock in a lower rate. On Wednesdays, markets fluctuate more, and rates could plummet or rise over the course of the day.


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