Mortgage rates impact buyers and sellers significantly, but it’s a concept frequently misunderstood. With the importance of mortgage rates in real estate, it’s a topic worth exploring.
The Basics: What Are Mortgage Rates?
When you buy a home and you borrow money in the form of a mortgage, the bank typically agrees to pay around 80% of the total cost. The remaining 20% is your down payment. You agree to not only pay back what you borrow but also interest over a set period. Often home buyers will opt for a 30-year mortgage, which means a longer time they repay the loan, but smaller monthly payments than with a shorter term.
The mortgage interest rate is how much you pay annually to borrow money from a lender. Mortgage rates are a percentage of your total loan balance. Each monthly mortgage payment you make is a portion of the principal plus interest.
If you have a 5% mortgage rate, each year, you pay 5% of the total of your loan balance in interest. As you pay more of your principal down, you also pay less interest.
How Are Mortgage Rates Determined?
Mortgage rates go up and down based on a variety of factors. You may see a decline in mortgage rates if the stock market is going down or there are issues in foreign markets. Rates may also go down if there is an increase in unemployment or inflation.
Mortgage rates might go up when the opposite happens—for example, if the stock market is performing well.
When the Federal Reserve raises benchmark interest rates, this can impact mortgage rates also. In 2018, there were four interest rate hikes, and there were three in 2017, which meant higher mortgage rates. While the Fed does impact mortgage rates, they don’t set them.
How Are Buyers Affected By Mortgage Rates?
Mortgage rates affect buyer power in the real estate market. Each time there is a change of 0.125% in mortgage rates, it can lead to an increase or decrease in buying power. Rates affect not only how much house you can afford in general, but what your payment will be. When someone gets a new 30-year-mortgage, around 95% of their initial payments go toward interest. The lower the rate you get on your mortgage, the less interest you’re paying, and that means a lower monthly payment, which impacts affordability.
In addition to large-scale economic factors, individual factors play a role in the mortgage rate you’re offered as well. A lender will look at your full financial picture, including your credit score, income, and employment, when they determine your specific rate.
Where Do Mortgage Rates Stand Now?
According to CNBC, mortgage rates have “been on a roller coaster in recent months.” In mid-October, there was a spike, and that led to a decrease in mortgage application volume of 11.9% from the prior week. Even so, volume was still more than 50% higher than this time a year ago because last year the rates were quite a bit higher.
The average interest rate for a 30-year-fixed-rate mortgage went up to 4.02% from 3.92 in the middle of October.
Experts believe mortgage rates are likely to stay below 4% through 2020, meaning that you still have time to find a good buying opportunity. The thought is that ongoing economic uncertainty and trade wars will keep rates low. There’s also the potential for a few rate cuts from the Fed in 2020 as a result. Of course, there’s never a guarantee.