Understanding Mortgage Interest Rates

House hunting is fun and exciting, but mortgage “hunting”? Maybe not so much. But this doesn’t have to be the case. To effectively shop for a mortgage, most individuals and couples just need to better understand mortgage rates, which are the primary factors that drive mortgage pricing.

Not to worry – we’re here to explain the ins and outs of mortgage rates (whether you’re buying or refinancing) so that you are better prepared to not only compare loan rates and offers, but make smart financial decisions that benefit you the most.

First off, how does interest work on a mortgage?

We all know that interest rates are what a lender charges to let you borrow their money. Mortgage interest rates are no different; the rate determines the amount of interest you’ll pay the lender over the life of the mortgage. Your monthly mortgage payment will be made up of both your monthly principal and interest payments. The interest rate doesn’t reflect fees or other loan charges, which is why you may also hear the term “APR” (annual percentage rate). This is the full loan cost plus fees (such as loan origination fees and closing costs), and it’s not used to determine your monthly payment.

How are mortgage rates determined?

Interest rates are influenced by the financial markets, and they can change daily – or multiple times within the same day. Rate fluctuations are based on many different economic indicators, and while the Federal Reserve doesn’t set interest rates, it does influence them. Other variables that affect the rate are the type of loan you get, the term of the loan (such as 15-years versus 30-years), and of course your personal financial situation as the borrower. See the differences in monthly payments and total costs with our mortgage comparison calculator.

Lenders will look at things like:

• Your income and employment history
• Your down payment amount. Typically, if you pay more up front, you may get a lower rate.
• Your desired loan amount
• Loan-to-value ratios. How does the amount of the mortgage compare to the appraised value of the property?
• Your credit worthiness, including your credit score, and repayment history. Are you a lower-risk borrower who will likely pay the loan back in full? Or are you high-risk based on your loan repayment history and more likely to miss making monthly loan payments?
• Your cash reserves and personal financial assets
• Your levels of outstanding debt in relation to your income levels, known as debt-to-income ratio
• Whether you’re purchasing a home or refinancing an existing mortgage
• The property and occupancy type
• Property location, including state and county
• Loan term. Shorter-term loans have lower rates but higher monthly payments because you’re paying off the principle balance over a shorter period of time

How can I get a rate quote?

You can obtain a rate quote in minutes at AmeriSave.com. From the homepage, go to the “Get Rates” box on the homepage, enter your information, and get rate quotes specific to the criteria you enter. Please be sure that you have entered your information correctly, as our rates are driven by many different factors. Click the “Next” button to the rate and terms that you desire. You can get your quoted rate and preapproval for credit in just three minutes! Alternatively, you can choose to talk to one of our experienced mortgage bankers and they can just as easily provide you with a rate quote.

AmeriSave provides multiple rate and payment options, one of the many things our customers appreciate about us. Published mortgage rates are updated as quickly as possible, based on market changes, and we provide all of the rates and options available to us for that day at the time of your search. This allows you to decide what rate or cost option works best for your personal financial needs.

AmeriSave.com also allows you to compare our rates to other quotes you have received. But you’ll find that AmeriSave’s rates and costs are comparably lower than others and considerably lower than the national average. This is because we are a company built on sophisticated technology. The AmeriSave business model is based on flexibility and lower overhead, allowing us to pass along substantial savings to our borrowers in the form of competitive rates and fees.

How can I get the best interest rate?

Even though AmeriSave offers low mortgage rate options, it’s always wise to compare rates from multiple mortgage lenders and loan offers. Make sure you grab a cup of coffee and carefully read over the full loan estimate (which includes closing costs) from each lender so that you fully understand all the calculations that are part of each estimate. It’s also helpful if you keep an eye on daily mortgage rates yourself; they fluctuate frequently, so you’ll want to stay in tune with them until you’re ready to lock. Rate lock guarantees your interest rate and holds it for a specific period of time until your closing.

Another way to lower your rate is to consider paying points. Discount points are a form of prepaid interest, a type of fee that you pay at closing to lower the interest rate for the term of the loan. One point is equal to 1% of the total loan balance, so if you want to purchase one point on a $300,000 loan, you’ll pay $3000. You need to think through how long you plan to stay in your home and how long it will take you to replenish the costs of the points you purchase. The longer you plan to stay, the more it’s worth considering paying points to lower your interest rate. As you calculate the numbers, compare what you’ll pay each month by paying points versus not paying points. This decision is unique to each borrower and something you should talk through with your mortgage banker.

You may want to checkout some useful tools and resources from the CFPB (Consumer Financial Protection Bureau) when you are shopping and exploring interest rates. Additionally, the FDIC (Federal Deposit Insurance Corporation) – an independent agency created by the United States Congress – provides useful resources including tips for getting the best mortgage.

Basic rate types: Fixed-rate and adjustable-rate

Speaking of how long you plan to stay in your home, there are a few basic rate types and whether you plan to be a short-term or long-term homeowner will affect which one is right for you.

With fixed rates, your interest rate will always be the same and not change over the life of the loan. Your monthly payment remains the same and you’ll have the mortgage paid off at the end of the loan term (e.g. 15-years, 30-years, etc.). Alternatively, an adjustable rate is just that – it adjusts over time. You would have a guaranteed fixed rate at the beginning of the loan term for a specified number of years (e.g. 5-years, 10-years, etc.), and once that period ends, the loan rate will change. This means your monthly payment will also change. An adjustable rate mortgage (ARM) has limits on how high the rate can go after the fixed rate period has ended. Then there’s a variable rate mortgage, where your interest rate changes with the market but your monthly payments; however, the amount of money that goes towards principle and interest will fluctuate based on the variable interest rate.

For homeowners who do not expect to be in their home for more than a couple of years and plan to move in a relatively short timeframe, an ARM may be an ideal option, as the initial interest rate will likely be lower for the first 5-7 years (learn more about adjustable rate loans) . If you’re looking to buy a home and remain in it for many years, a fixed rate mortgage loan may be a better choice (learn more about fixed rate loans). Talk to one of our mortgage bankers about what your monthly payments would like look depending on whether you get a fixed, adjustable or variable rate loan. A customer-focused mortgage banker will calculate various scenarios for you so that you can confidently make the right decision when selecting the right loan rate and loan term for your personal financial goals. We’re here to help!