This is a tricky moment to buy a new home. Mortgage rates have increased dramatically and it costs more to borrow now than at any other time in the past 20 years. In this environment, it's critically important to compare offers from different lenders to find the lowest rates and minimize fees in order to make buying a home more affordable. Here's everything you need to know about mortgage rates, how they work and how to find the best deal for you.
What to know first
Mortgage rates are at their highest level in 20 years, having surpassed the 7% mark and cooled down the housing market in the process. The Federal Reserve has made aggressive rate hikes in an attempt to combat persistent inflation, and another increase -- albeit potentially smaller -- seems likely at the final meeting this year.
Higher mortgage rates -- even when they increase by only a few tenths of a percentage point -- can add tens of thousands of dollars to your loan over time. Higher rates shouldn't discourage you from buying a home, however. Mortgage lenders are for prospective homebuyers. Higher rates are forcing some buyers to pause their searches. And even though rates have increased, they may go higher still.
What is a mortgage rate?
Your mortgage rate is the percentage of interest a lender charges for providing the loan you need to buy a home. The interest helps cover the costs associated with lending money -- and there are multiple factors that determine the rate you're offered. Some are specific to you and your financial situation and others are influenced by macro market conditions, such as the overall level of demand for loans in your area or nationwide.
What factors determine my mortgage rate?
While the broader economy plays a key role in mortgage rates, there are some key factors under your control that impact your rate.
- Your credit score: Lenders will offer the lowest available rates to borrowers with excellent credit scores, of 740 and above. Lower credit scores are deemed greater risks for the potential of default, so lenders will charge higher rates to compensate.
- Your down payment: Your down payment affects your loan-to-value ratio. For example, if you're making a down payment of $50,000 on a house that costs $500,000, you have a loan-to-value ratio of 90%. As a broad rule, lenders will offer lower rates if you can lower the loan-to-value ratio. For example, a borrower putting down just 3% of the purchase price will likely pay a higher rate than a borrower who puts down 25% of the purchase price.
- The loan term: The most common mortgage is a 30-year fixed-rate loan, which spreads your payments over three decades. Shorter loans such as 15-year mortgages have lower rates. However, the payments will be bigger because you'll only have half the time to pay back the money.
- The loan type: The loan type will impact your interest rate. Some loans have a fixed interest rate for the entire life of the loan, while others have an adjustable rate -- which could result in significantly higher payments down the road.
- The property's location: If you're buying a home in an area where the rate of foreclosure has been higher, lenders may take that into consideration with your mortgage.
Current mortgage and refinance rates
We use information collected by Bankrate, which is owned by the same parent company as CNET, to track daily mortgage rate trends. The above table summarizes the average rates offered by lenders across the country.
What is 'annual percentage rate' and what does it mean for mortgages?
The annual percentage rate, or APR, represents the true cost of your loan by factoring in the interest rate and other costs such as lender fees or prepaid points. So, while you might be tempted to see an offer for "interest rates as low as 6.5%" it's important to look at the APR instead to see how much you're really paying.
Pros and cons of getting a mortgage
|You'll build equity in the property instead of paying rent with no ownership stake.||You'll take on a sizable chunk of debt.|
|You'll build your credit by making on-time payments.||You'll pay more than the list price -- potentially a lot more over the course of a 30-year loan -- due to interest charges.|
|You'll be able to deduct the interest on the mortgage on your annual tax bill.||You'll have to budget for closing costs to close the mortgage, which add up to tens of thousands of dollars in some states.|
How does the APR affect principal and interest?
Most mortgage loans are based on an amortization schedule: You'll each month for the life of the loan even though the generated interest will be highest at the beginning of the loan and will taper as the principal decreases. (Your amortization schedule will show how much of your monthly payment goes to interest and how much pays down the principal of the loan.) Ultimately, most borrowers appreciate the convenience of a fixed, predictable monthly payment.
Shopping mortgage rates
Mortgage lenders often publish online their rates for different mortgage types, which can help you research and narrow down which lenders you apply to for. Shopping around is an important part of the process. And it's often to rush the process.
Frequently asked questions
What credit score do you need to get a mortgage?
Most conventional loans require a credit score of 620 or higher, but Federal Housing Administration and other loan types may accommodate lenders with scores as low as 500, depending on your down payment. If you have a high credit score, you may be offered a lower interest rate and more modest down payment. Improving your credit score before applying for a mortgage can save you money even if you already qualify for a loan.
"Credit is the biggest factor in interest rates on both mortgages and all other lending products, so making sure credit balances are below 30% is key to maximizing a credit score," says Lotz. "If a person finds errors on their credit report, they should dispute them to ensure the most accurate history."
How are mortgage rates determined?
Your credit score isn't the only factor that impacts your mortgage rate. Lenders will also look at your debt-to-income ratio to assess your level of risk based on the other debts you're paying back such as student loans, car payment and credit cards. Additionally, your loan-to-value ratio plays a key role in your mortgage rate. A larger down payment will reduce your loan-to-value ratio, which lenders like to see.
However, you don't want to stretch so far with your down payment that you are left without cash reserves when you move into your home, and keeping some liquid savings may help your lender's confidence in your ability to pay back the loan, potentially lowering your rate.
What is a rate lock?
A rate lock protects you if mortgage rates rise between the time you're preapproved and the time you actually close on the house. For example, if you lock in a rate at 6.5% today and your lender's rates climb to 7.25% over the next 30 days, you still get the lower rate. Rate locks don't last forever, though. A common rate-lock period is 45 days, so you're still on a tight timeline. Be sure to ask lenders about rate lock windows and the cost to secure your rate.
Will rates go up or down?
Mortgage rates are always moving, and it's impossible to predict the market. However, all signs point toward an additional uptick in mortgage rates due to the Federal Reserve's efforts to fight inflation in the short term. There is some good news a bit further on the horizon, though. Freddie Mac's forecast calls for 30-year mortgage rates to fall from 6.8% at the end of this year to 6.2% at the end of 2023.