Current Mortgage Interest Rates & What To Look Out For in 2020
Buying a house is part of the American dream. Over the last two decades — with slowing wage growth and higher rates of student debt — more and more people are waiting to buy their first house.
Chances are you’ve heard about a loan called a mortgage. A mortgage is a personal loan that helps you purchase a home, as most people do not have the capital to buy a house outright. Mortgages are loans that can come from the government or a bank. Mortgages are slowly paid off by monthly installments over a span of many years.
Because mortgages are a loan, lenders make their money by charging interest rates on the principal borrowed. Accrued interest rates add up to be expensive over time — this is why it’s important to get the best interest rate possible.
Here are some of the best rates on the market going into 2020.
(These rates are based off of Los Angeles, California, and vary from state to state. The current national average for mortgages is hovering around 3.75% for a 30-year fixed term, 3.06% for a 15-year fixed term, and 3.64% for a 5-year 5/ARM rate. Going into 2020, mortgage rates have lowered by almost a percent from last year and are predicted to stay under 4% for 2020.)
What makes up a mortgage rate?
There are a lot of factors that go into calculating your mortgage interest rates. Mortgage interest rates aren’t that different than trying to apply for any other loan. Here are some of the factors that go into calculating your mortgage rate:
Credit Score: Your credit score helps lenders weigh risk on whether or not to loan you money and how reliable you may be paying it back. Having low to zero credit card debt will definitely make you look more responsible to the lender. The higher the credit score, the better rate you’re looking at. Usually, a score of 760 or better will get you the best rates on the market.
Total down payment: The amount of money you have for a down payment also gives lenders a picture of how risky you might be. The minimum amount for a down payment is 3% of the total home’s cost. However the less you put down for a house, the more risk the lender takes on in case you default. A larger cash contribution upfront will save you money in the long run, and make you look more responsible to lenders.
Loan type: The main types of mortgage loans are: conventional, government-insured, and jumbo loans. More on that in just a bit.
Length of loan: Mortgage loans typically come in 30, 20, 15, and (rarely) 10-year term lengths. Generally the shorter the loan, the lower the mortgage interest rate.
Property location: While the property itself won’t impact how much money you can be approved for, it can have an impact on where you decide to live. Being in a more affluent neighborhood will most likely affect how much money you’ll need to borrow from a bank. The more money you borrow will affect your debt-to-income ratio, which is used to help calculate your credit score and thus, your interest rate.
Loan-to-Value Ratio: This is a little more indirect than the other factors that make up your mortgage rate — however, it can have a huge impact on how much you pay for your home. The loan-to-value ratio is an equation that lenders use to assess the results of the home’s value compared to how much you’re asking to borrow. For example, if you’re looking to buy a home for $300,000 and you’re applying for a loan of $250,000, your LTV ratio is 83%. Conventional mortgage lenders often give the best rates to buyers with LTV ratios no higher than 80%. If your LTV ratio is too high, the lender may ask the buyer to purchase PMI (private mortgage insurance) to take the risk of the loans off the lender. PMI is insurance for your mortgage if you are not able to put a 20% downpayment on a house. It is required by law to have it until you’ve made payments equivalent to paying off 20% of your house.
What are the different types of mortgages?
Conventional loan: (also called fixed-term loans) The most common types of mortgages. The borrower will have the same payment amount over an agreed period of time at the same interest rate. Conventional loans are most commonly found through large financial institutions and mortgage brokers.
Government Funded Loan: The difference between a GFL and a conventional loan is that the interest rate is usually lower than what you find through a bank. They mostly are dedicated for veterans (VA loans) and first-time homebuyers (FHA). The rates tend to be a little lower for these two sections. It’s good to keep in mind that FHA loans can come with income restrictions and may vary depending on where you live.
Adjustable Rate Mortgages: These interest rates are tricky but there can be advantages to them. Essentially the interest rate and repayment plan start out lower at the beginning of your loan but every couple of the years the payments start to grow. These historically have been called balloon mortgages. The advantage of these types of loans is for buyers who don’t plan on staying in their homes for very long and plan to sell before the payments start to get larger.
Jumbo loans: The name jumbo loan pretty much says it all. These are for the affluent home buyers that want to purchase a high-end home who has large down payments and excellent credit scores.
What are the different term lengths for mortgages?
Mortgages come in all sorts of term lengths. Conventional (fixed-term loans) tend to come in packages of 30, 20, 15, and sometimes 10 years. Adjustable-rate mortgages might start off with 5 or 7 years at a low-interest rate and then increase the payment amounts for the duration of the loan. Jumbo loans come in both fixed term and adjustable mortgage loan agreements.
How much can I borrow for a mortgage?
This entirely depends on the type of loan that you apply for. Conventional loans usually require a 3% down payment minimum while VA loans might let you finance the home’s purchase price. It comes down to what type of you can apply for and how much you can afford to put towards a down payment upfront, as well as the amount to make consistent payments moving forward.
What is the difference between a mortgage interest rate and APR?
The interest rate you have on a mortgage only tells part of the story. The annual percentage rate is a better indicator of the actual amount you’re paying on the loan. The APR includes brokerage fees, PMI (private mortgage insurance), closing costs, and discount points to your rate.
How do I get the best mortgage rate?
When you’re starting to look for a house, shop around. There are lots of places to turn to, including banks, credit unions, mortgage brokers, and direct lenders. Talking to banks in person is key because their rates on their website might be out of date depending on what is happening in the market. If lenders know you’re shopping around, they will be quick to ask what other institutions are offering in order to get your business. This may result in removing fees and discounting their rate if they know you’re serious.
A lot goes into finding the best mortgage type, length, and interest rate. Start by doing some self-research on the internet and browsing online to get a feel about average mortgage rates. Figure out how much you can afford for a down payment and check your credit score. There are lots of online calculators that can help estimate mortgage rates. If now is not the time, keep watching the markets.
Interest rates have been on the decline for the past year. Once you determine that now is the time to buy a house, make sure to shop around with many lenders, and don’t be afraid to barter for a better deal.