Mortgage rates haven’t changed much since last Tuesday, but overall they are trending down.
If you want to buy a home in the near future, you can opt for a fixed rate mortgage rather than a variable rate loan.
Darrin English, Senior Community Development Loan Officer at Quontic Bank, told Business Insider that there is generally an advantage to an adjustable rate mortgage, in which the rate fluctuates after an initial period. This benefit is usually a lower rate for the fixed period.
However, he points out that MRAs do not currently follow this pattern. Fixed rates are currently better than adjustable rates because lenders want customers to stay in touch with them as long as possible. Even though the 30-year fixed rate and adjustable 5/1 rate are roughly the same right now, you might see your ARM 5/1 rate go up in five years, while you could lock in a low rate for decades with a duration of 30 years.
Federal Reserve Bank of St. Louis rate.
Fixed mortgage rates have declined slightly since the same time last week, and adjustable rates have remained the same. Mortgage rates have generally been falling since this time last month.
Overall, mortgage rates are at historically low levels. The downward trend becomes more evident when looking at rates from six months or a year ago:
Federal Reserve Bank of St. Louis rate.
Lower rates are usually a sign of a struggling economy. As the US economy continues to grapple with the coronavirus pandemic, rates will likely remain low.
Bankrate rate.
Refinancing rates have remained stable since last Tuesday, and have declined since November 29.
With a 30-year fixed mortgage, you’ll pay off your loan over 30 years, and your rate will stay locked in for the duration.
You will pay a higher interest rate on a 30-year fixed rate mortgage than on a 15-year or 10-year fixed rate mortgage. For a long time, you will also pay a higher rate on a 30 year fixed loan than on an ARM 5/1. But now, fixed 30-year rates are more advantageous.
Monthly payments are lower for 30-year terms than for shorter terms because you are spreading the payments over a longer period.
You will pay more long-term interest with a 30-year term than with a shorter term, because a) the rate is higher and b) you will pay interest longer.
With a 15-year fixed mortgage, you pay off your loan over 15 years and pay the same rate all the time.
15-year mortgage rates are lower than 30-year mortgage rates. Between the lower rates and paying off the loan in half the time, you’ll pay less in the long term on a 15-year mortgage than on a longer term.
However, your monthly payments will be higher for a 15-year loan than for a 30-year loan. You pay off the same amount of principal in less time, which means you’ll pay more each month.
It’s not very common to get a 10-year term on an initial mortgage, but you can refinance it to a 10-year mortgage.
Lenders charge similar interest rates for 10- and 15-year terms, but you’ll pay off your loan faster with a 10-year term.
With a variable rate loan, your rate stays the same for the first few years and then changes periodically. Your rate is locked in for the first five years on an ARM 5/1, then your rate goes up or down once a year.
ARM rates are currently at their lowest, but a fixed rate mortgage is still the best solution. Fixed 30-year rates are comparable or lower than ARM rates. It might be in your best interest to lock in a low rate with a 30-year or 15-year fixed rate mortgage rather than risk your rate rising later with an ARM.
If you are considering a variable rate mortgage, you should still ask your lender what your individual rates would be if you chose a fixed rate rather than a variable rate loan.
It might be a good day to apply for a mortgage, but don’t worry if you aren’t ready yet. Mortgage rates should stay low for months (if not years), so you’ll likely have plenty of time to take advantage of the low rates.
To get the best possible mortgage rate, consider working on improving your finances. Here are some tips for getting a low mortgage rate:
- Improve your credit rating. Making all of your payments on time is the most important part of improving your score, but paying off debt and aging your credit also helps. You can request a copy of your credit report to verify that it is free of errors.
- Save more for a down payment. Depending on the type of mortgage you get, you may not even need a down payment to get a loan. But lenders usually give you a better rate when you have a larger down payment. Since rates are expected to stay low for a while, you probably have time to save more.
- Lower your debt to income ratio. Your DTI ratio is the amount you pay each month for your debts divided by your gross monthly income. Many lenders want a DTI ratio of 36% or less, but the lower your ratio, the better your rate will be. To improve your ratio, pay off debt or consider opportunities to increase your income.
If your finances are in good shape, you could get a low mortgage interest rate right now. Otherwise, you have plenty of time to make improvements to get a better rate.
Laura Grace Tarpley is Associate Editor of the Banking and Mortgages column for Personal Finance Insider magazine. She deals with mortgages, refinances, bank accounts and bank reviews.
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