The Truth about Mortgage Rates

11/04/2019

Mortgage rates are a critical factor in the home buying process, and their fluctuating nature requires a comprehensive understanding. The truth is, mortgage rates are subject to change, often varying from one day to the next. For prospective homeowners, being well-informed is crucial in navigating how mortgage rates impact the home buying journey.


The truth about mortgage rates - USA Mortgage

The Annual Percentage Rate (APR) in Mortgages


The Annual Percentage Rate (APR) plays a pivotal role in mortgage planning. It is a composite rate that includes the interest rate, potential broker fees, and additional points integral to the mortgage process. Contrarily, the interest rate is a straightforward percentage applied monthly on the total loan for your home mortgage. Both interest rates and APRs can differ based on whether you choose a fixed or an adjustable rate. Given the current rise in rates, paying close attention to both the APR and interest rate is vital. A low rate accompanied by a high APR might indicate the need to explore other lending options.


Fixed-Rate vs. Adjustable-Rate Mortgages


A fixed-rate mortgage offers stability, with a constant APR and interest rate throughout the loan period. In contrast, an adjustable-rate mortgage (ARM) has a rate that can change over the loan’s term, often annually, in line with market interest rates. This means your monthly payment could either increase or decrease. With rising rates, adjustable-rate mortgages are becoming more prevalent. Your decision between a fixed or adjustable rate should align with your short-term and long-term housing goals.


Finding the Best Mortgage Rate


To secure the best mortgage rate, it is advisable to consult with local banks or credit unions for current mortgage offers. Shopping around and staying informed about competitive home loan options is key. If a more advantageous deal is available outside your current lender, it could offer significant financial benefits for you and your family.


Factors Influencing Mortgage Rate Fluctuations


Mortgage rates fluctuate due to various factors, including supply and demand dynamics. Increased bank deposits can lead to lower interest rates as banks have more funds to lend. Additionally, the Federal Reserve and the U.S. Treasury adjust rates based on market conditions and inflation.


Mortgage Rates and Home Affordability


As rates increase, home affordability decreases. To maximize your purchasing power, it’s advisable to act before further rate hikes. For instance, a monthly budget of $960 can finance:

  1. A $180,000 loan at 5.00% interest (5.27% APR), with a $966 payment.
  2. A $200,000 loan at 4.00% interest (4.25% APR), with a $955 payment.

Notably, a mere 2% rate increase can affect affordability by up to $40,000.


Mortgage Rates and Rate Locks

Understanding Mortgage Rate Locks


Mortgage rate locks protect borrowers from rising rates during the application-to-closure period. Longer locks generally cost more due to the increased risk and the need for lenders to hedge against rate fluctuations, often using financial instruments like U.S. Treasury Bonds. The decision to lock a rate should be based on personal comfort and the type of loan being considered, as different loans exhibit varying rate volatilities.

In conclusion, understanding mortgage rates is fundamental for prospective homeowners. By being well-informed, you can make educated decisions that align with your financial goals and housing aspirations. Our mortgage loan originators are available to assist you in this process, ensuring a smooth and informed home buying experience.

Michael Vanella

Michael Vanella

Mortgage Loan Originator at USA Mortgage Abadi Region