What Does a Mortgage Rate Mean?
Simply put, a mortgage rate is the interest rate on a mortgage loan. It is a standard variable-interest rate that is used by mortgage lenders. Prevailing mortgage rates are dictated by the market and are ultimately tied to long-term treasury yields.
A treasury yield is the relationship to a loans interest rate and time of maturity in today's current currency.
Your mortgage rate amount will vary depending on a wide range of factors, including market conditions, your own credit history and risk factors, the loan size and payback period. The amount will also depend on the type of mortgage you select.
What Are the Different Types of Mortgage Rates?
In your mortgage-shopping process, you'll find that there are a variety of mortgages available. The one you select will determine many factors about your mortgage, including payment terms and mortgage rate.
Basic Types of Mortgages Available
- 30-year fixed-rate mortgage - Perhaps the most traditional type of mortgage, a fixed mortgage can carry an interest rate that is generally higher than starting rates on other types of loans. However, you should keep in that mind your interest rate and payment will stay consistent throughout the life of the loan, which can be very valuable when it comes to long-term financial planning. Another option here is a fixed-rate loan carrying a term of 15 to 20 years. These loans carry less interest, but keep in mind that monthly payments will be far higher than with a 30-year fixed loan. These shorter-term fixed loans can help you build equity faster and also pay much less interest over the long term. Though some lenders also provide 40-year fixed-rate loans, be aware that you will spend far more in interest on these loans since the terms are longer.
- One-year adjustable-rate mortgage (ARM) - With a one-year ARM, you will also have a 30-year term, but your interest rate will adjust each year. The fluctuations in your interest rate are determined to the particular index to which your loan is tied – this is typically the one-year Treasury rates or the London Interbank Offered Rate (LIBOR) index. ARMs can also be tied to the Federal Reserve Cost of Funds index (COFI). Each year your lender will determine your new interest rate by adding a specific margin to your index; rates usually rise or fall no more than 2 percent points on a yearly basis and can rise no more than 6 percentage points over the life of the loan. While ARMs start off with “teaser” rates that are below market, they will start to rise within the first few years of the loan. If you're considering an ARM, make sure you're prepared to handle fluctuating interest rates for as many as 30 years.
- Hybrid mortgages - These have features similar to both fixed- and adjustable-rate loans. For example, a loan can offer a fixed
rate for the first few years, then convert to a one-year ARM for the rest of its lifetime. You can save money with these loans if
you're certain that you will be moving within three to five years - but remember that these loans can adjust every six months or
even more frequently once their fixed period is over. This can have serious consequences for your interest rate, so pay attention
to interest-rate caps that protect you.
Video: What type of mortgage loan is right for me?
- Interest-only mortgages - With an interest-only mortgage, your lender allows you to make interest-only payments during a fixed
introductory period, typically five years. After that period expires, you must repay the loan's principal and interest within the
remaining lifetime of its term. While good for cash-strapped borrowers during their first few years, interest-only loans can
provide a shock to the system when they adjust – and rising interest rates can make this shock even worse. If you're only seeking
to stay in your home a short term, an interest-only mortgage can make sense – but if you're looking to reside in your property
long-term, this may not be the wisest choice if you want to avoid sticker shock.
Video: Interest Only Mortgage
- Payment-option loans - These loans give you a choice when it comes to payment options. While some options are straightforward, others can be complex – and rates vary depending on which option you select. You can opt to pay only the interest due each month, or to make a smaller minimum payment that covers only interest and not any of the principal. While this can make your mortgage payments more convenient and flexible, it can also lead to sticker shock if your loan balance grows rather than shrinks.
Refinance and Home Equity Loans Differences
It's also important to understand the difference between refinance and home equity loans. Most banks base their home equity rates on the Wall Street Journal prime rate – the shortest-term market rate available – and long-term equity loans tend to carry higher rates than fixed mortgages such as cash-out refinances.
However, lines of credit can also offer more flexibility than refinance loans, so it's important to carefully consider why you want the money before deciding on your loan option.
Why Do Mortgage Rates Fluctuate on a Daily Basis?
Mortgage rates can change not only on a daily, but even an hourly basis. This is because they fluctuate on supply and demand, which can change on a daily and even a minute-by-minute basis. For example, if a greater amount of people are seeking credit, rates will reflect this – and they will also reflect if fewer people want credit, in which case rates will become more competitive.
Mortgage rates also fluctuate differently depending on the index to which they're tied. The most prevalent interest rates and indexes include the prime rate, the LIBOR, Treasury bill rates, Treasury bonds, the Cost of Savings (COSI) index, the 11th District Cost of Funds (COFI), the Certificates of Deposit index, and the Federal Funds rate. Understanding these different indexes, as well as knowing to which your loan is tied, will help you better understand the fluctuation of rates from day to day.
Other factors besides supply and demand can also affect rates. These include current events, inflation, bond prices, and bond rates. You can stay competitive by using multiple mortgage brokers in order to get the best rates. Using multiple mortgage brokers means you'll be able to evaluate a variety of different offers and choose the one that works best for your individual needs.
Which Lenders Are Best?
Here is a list of the top 10 nationwide banks. Make sure to evaluate each carefully to make sure what they offer meets
your mortgage needs.
Bank of America: (888) 293-0264
JPMorgan Chase: (800) 873-6577
Wells Fargo: (877) 937-9357
Citibank: (800) 667-8424
PNC Bank: (800) 996-9584
U.S. Bank: (888) 831-7524
Suntrust Bank: (800) 634-7928
Citizens Bank: (800) 612-6206
Capital One: (866) 923-4954
Regions Bank: (800) 986-2462
Before applying for a mortgage, make sure to gather all your pertinent financial documentation. This includes pay stubs, bank statements, and your personal credit history, including a current credit report. It's important to evaluate your personal creditworthiness before contacting a lending institution – if you know where you stand, you can decide which mortgage option is best for your needs.