It’s difficult to talk about real estate without mentioning mortgage rates. Real estate often involves a buyer and a seller. Here, the buyer pays outright to own the property.
Conversely, mortgages involve a buyer and a lender. Hence, the mortgage lender allows the buyer to pay the cost of the property over a definite timeline.
Stats show mortgages represent over 70% of customers’ debts in the US. In total, Americans owe more than $11 trillion in mortgages. Did your jaw drop? Ours did too!
Mortgages aren’t necessarily bad. However, some people fail to repay on time. One major reason is that they don’t fully grasp mortgage loan terms before putting pen to paper. The majority are confused with “rates,” a key mortgage terminology.
At Homes by Ador, we understand how crucial mortgage rates are and how they impact home buying. This post outlines all you need to know about mortgages and how associated rates are determined.
What Are Mortgages?
Different mortgage loan definitions exist. However, to understand mortgage rates, you must first understand the word “mortgage.” A mortgage refers to an agreement between a lender and a borrower.
This contract lets the mortgage lender claim the borrower’s property if they don’t repay the money owed plus interest. In addition, the mortgage lender would typically require a down payment before giving out money.
Now, the money given by the lender to the borrower is the mortgage loan. Meanwhile, the interest the borrower pays is the mortgage rate — otherwise known as mortgage interest.
Technically, mortgages can apply to any transaction that involves lending. However, it’s more particular to real estate since it involves property. Today, most people collect mortgage loans for the sole interest of purchasing a house.
For instance, a borrower takes a mortgage loan from the bank and purchases a home. If the borrower doesn’t repay the loan and interest on time, the bank can seize the house they bought.
People who already own homes can also take mortgages. This loan won’t be used to purchase property but to settle other needs. Regardless, the mortgage terms remain the same, and they’ll forfeit their property if they don’t repay the loan amount plus interest within the stipulated period.
Usually, borrowers contact a mortgage broker to connect with lenders. This scenario is similar to when a real estate agent connects buyers and sellers. However, many people collect conventional mortgage loans without hiring a mortgage broker.
How Are Mortgages Rates Determined?
When you collect a mortgage loan, you usually get many years to repay. A typical mortgage loan repayment period hovers around 10 to 30 years. This timeframe is understandable, considering the expenses tied to landed properties.
Traditionally, mortgage lenders are solely responsible for fixing the interest rate. Although lenders still set the rates nowadays, they do so under external influences.
For the most part, rates depend on demand and supply. If demand for mortgage loans is high, the mortgage interest rate will be high, and vice versa. However, some specific factors affect mortgage rates, and they include:
Inflation affects every sector of the economy, so rates on mortgage payments aren’t left out. With high inflation, the dollar’s purchasing power reduces. So, mortgage lenders have no option but to increase their interest payments for more value.
Here’s a practical example:
Let’s say you collect a mortgage loan at a 6% interest rate when the annual inflation rate is set at 3%. This scenario means the mortgage lender is only profiting 3% from your mortgage payments.
With inflation rising yearly, rates on fixed rate mortgages are typically high. To get a true 6% from your mortgage payment, the lender will up the interest rate to 9%.
Federal Reserve Interest Rate
The Federal Reserve interest rate is always present in the mortgage vocabulary. Most mortgage lenders (i.e., banks, credit unions, and mortgage brokers) are affected by the Feds’ interest rate.
When the Federal Reserve sets the federal fund rate, the price of credit changes. As such, long-term, short-term, and adjustable rate mortgage loans are all affected. If the credit price is high, the monthly mortgage payment rate also increases.
A borrower’s monthly mortgage payment also depends on housing market conditions. Here’s where supply and demand actually come into play.
In a state like Washington, for example, you would expect top-class market conditions since demand outweighs supply. Consequently, the mortgage interest rate on houses would be high. Indeed, it is — with an average of 6.86% on a 30-year fixed rate mortgage.
Types of Mortgages
Among the mortgage terms to know are the different types available. Although several factors affect mortgage interest amounts, the mortgage type plays a significant role in determining the annual percentage rate (APR). It also typically influences the monthly payment structure and closing costs.
Here are some types of mortgages you should know:
1. Conventional Loans
A conventional loan is one from a mortgage lender not affiliated with the government. In other words, they’re those collected from “private mortgage lenders,” another popular home loan terminology.
A conventional loan can be conforming or non-conforming. However, what’s most important for borrowers is having high credit scores. Credit scores should typically reach 620, or a borrower won’t qualify.
Furthermore, conventional loans often demand a 20% down payment at least. Borrowers that don’t meet this requirement must pay an upfront mortgage insurance premium. The most common is the private mortgage insurance (PMI).
2. Government-Insured Loans
Government-insured loans are the direct opposite of conventional mortgages. They’re mortgage loans provided by a government agency. Common formats include FHA loans and VA loans.
FHA loans are provided by the Federal Housing Administration, while the U.S. Department of Veterans Affairs offers VA loans.
The advantage of FHA or VA loans is that they come with competitive interest rates. Also, overly high credit scores are not mandatory, and you don’t make a huge down payment. For receipt, however, you may need to pay VA or FHA mortgage insurance.
3. Adjustable Rate Mortgage (ARM)
Adjustable rate mortgage loans come with fluctuating interest rates. How much you repay over time depends on market conditions. Also, this type of mortgage can be an advantage or disadvantage.
If market conditions improve over the years, an adjustable rate mortgage becomes favorable. You’ll pay relatively lesser interest rates. But if conditions worsen, you may be unable to repay your loan in the long run.
4. Fixed Rate Mortgage
“Fixed rate” is one of the most important mortgage terms. Unlike the adjustable rate mortgage, this mortgage type has a fixed interest rate. So, the money you pay over time doesn’t change, irrespective of what happens in the market.
A fixed rate loan is recommended if you require a short-term mortgage. Market conditions may not change much in five to seven years. But if it’s a long-term loan, it could be a disadvantage. The annual percentage rate on mortgages could fall, but you’ll still pay the same as when you acquired the loan.
How Mortgage Rates Impact Home Buying
We’ve discussed how mortgage rates are determined and the different types. Consequently, the picture of how it affects home buying becomes clear. Simply put, when mortgage rates are high, home-buying activities slow down. On the other hand, if rates are low, real estate agents get more work on their hands.
The cost of a real estate property will typically increase when a mortgage comes into play, as it involves principal and interest payments.
For example, a house could cost $500,000 to purchase. If you have the money, you pay just $500,000, and that’s it.
However, if you don’t have $500,000, you could opt for a home loan. Let’s say it’s a 20-year fixed-rate conventional loan with an interest rate of 5% per year.
Typically, you’ll pay a 20% down payment of $100,000. That means the actual mortgage size is $400,000.
The mathematics is a bit complex, but using a mortgage calculator, the total mortgage interest at the end of the 20 years is $233,557.51. Add that to the $400,000 mortgage size, and you pay $633,557.51 in total — $133,557.51 more than the property’s original cost.
If it’s an adjustable rate mortgage (ARM), the interest rate could increase over the years. Here, the borrower is at a disadvantage, as even the slightest rate increment can significantly affect the ultimate amount paid for the real estate property.
The change in monthly payments may be minimal. However, when you add them up over 15, 20, or 30 years, you get a huge sum.
How a Mortgage Loan Can Help With Home Buying
It’s true that mortgage rates mean you pay more for a real estate property over time. However, the rates can also work to your advantage in home-buying.
If you take a home loan with an adjustable rate, market conditions can fluctuate in your favor as the years run. In the end, you pay a relatively low amount in interest.
Furthermore, a mortgage can be a conventional loan option when you don’t have money to purchase a home. It’s not a loan you repay in a year or two. As established, the loan term can be 10 to 30 years.
A mortgage can also help improve your credit score if you make timely monthly payments. If it’s an FHA loan or VA loan, prompt monthly payments can place you in good standing to acquire other government agency loans.
Your Guide to Mortgage Rates in Massachusetts
Data from Bankrate suggests mortgage rates in Massachusetts are relatively lower compared to national averages.
A typical 30-year fixed-rate mortgage in the Bay State attracts a 6.64% interest rate. In comparison, the national average is slightly higher at 6.87%. For a 15-year fixed-rate mortgage, the rate in Massachusetts is 6.00%.
If you’re a first-time home buyer in Massachusetts, you have many conventional mortgage loan offers to choose from. These include programs like MassHousing Mortgage, One Mortgage, and Operation Welcome Home.
These programs typically allow low fixed-interest rates, with down payments of around 3% to 5%. On most, you won’t need private mortgage insurance (PMI).
However, don’t expect an overly high loan amount. Amounts usually range from $25,000 to $40,000. If you would like to apply for a higher loan amount, consider these lenders:
- Rocket Mortgage
- PenFed Credit Union
- New American Funding
- Guaranteed Rate
With these lenders, you get a workable annual percentage rate.
Rates stand out in the mortgage glossary because loan payments revolve around them. When there’s a loan, there’s an accompanying interest rate.
If you plan to purchase a home, monitoring mortgage rates is essential. It’s best to buy when rates are low compared to when they’re high. Also, ensure you settle for a mortgage type you’ll be comfortable repaying.
At Homes by Ardor, we can assist in making your home-buying process easier. Our real estate agents are well-versed in mortgage terms and definitions. Contact us today, and we’ll help you find properties that’ll suit your finances.
What Are Mortgage Terms?
The mortgage term refers to how long you have to complete the loan payment. In the US, mortgage terms are usually 10, 15, 20, or 30 years.
However, 30-year variations are the most common of home loan terms. Why? Because they feature lower interest rates.
Is Mortgage Insurance the Same as PMI?
No. PMI stands for Private Mortgage Insurance, and it’s a mortgage insurance type a borrower can acquire. However, it’s the most popular, so many use both mortgage words (mortgage insurance and PMI) interchangeably.
Why Are Mortgage Rates So High in the US?
Mortgage rates are relatively high in the US due to inflation and Federal Reserve interest rates. The US Federal Reserve increases interest rates to combat inflation. Consequently, the Fed rate hike causes rate spikes on mortgages and other credit channels.
How Can I Lower My Mortgage Interest Rate?
You can lower your mortgage interest rate by improving your credit score. Higher credit scores often translate to a lower interest rate. Also, be cautious when settling on a mortgage, especially long-term options. Compare multiple mortgage rate offers and opt for the most convenient.
Can I Negotiate My Mortgage Rate?
Yes, mortgage rates are negotiable. It’s even advised to negotiate the rate and loan term when collecting a mortgage. A real estate agent or mortgage broker can help with this.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.
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