Mortgage rates fluctuate, so the lowest rates today will be different than a year ago…or even yesterday! Use the chart below to compare the best mortgage rates for different loan types (for example, fixed, adjustable, or jumbo). Continue reading below to learn more about how mortgage rates work and steps you can take to get the best deal possible.
What is a mortgage rate?
A mortgage interest rate is a percentage that indicates how much interest you will pay, on an annual basis, for taking out a mortgage. A mortgage interest rate is also known as an annual percentage rate, or APR.
For example, if your mortgage rate is 4%, you will pay $400 per year in interest for every $10,000 you borrow. If your mortgage rate is 5%, you will pay $500 per year in interest for every $10,000 you borrow.
Interest is only charged on the outstanding balance of your loan. The amount of interest you pay declines with every monthly payment you make because the interest rate is applied to a smaller loan balance. You can see this in action by looking at a mortgage amortization schedule, which shows how your loan balance changes over time and how much of each monthly payment is principal and interest. Try our mortgage payment calculator with amortization schedule to see this in action.
What are mortgage points?
Mortgage points are simply pre-paid interest, with one point being equivalent to 1% of the total loan amount. Typically people choose to pay mortgage points to “buy down” their APR, resulting in a lower mortgage rate.
Mortgage points require coming up with additional cash up front but can save buyers money over the long-run. Paying mortgage points can be a good strategy for buyers who know they are going to stay in their home for a decade or more and will not be paying off their mortgage early. Points can backfire, however, if you sell your home or payoff or refinance your mortgage too soon.
For example, if someone buys one mortgage point on a $200,000 home loan, they would be required to pay $2,000 at closing (over and above their down payment and any other closing costs).
Let’s say their mortgage rate would have been 4% if they did not buy the mortgage point. If this were a 30-year fixed-rate mortgage and they held the loan for the full 30 years without making any additional or early payments, they would pay $143,739 in interest over the life of the loan. If paying the mortgage point reduce their interest rate by just one-tenth of a percent, to 3.90%, they would pay $139,599 over the life of the loan, or $4,140 less. Because they paid $2,000 for the mortgage point, this results in a savings of $2,140 over the life of the loan.
Often, paying mortgage points will result in a larger decrease in mortgage APR and a more significant savings over the life of the loan, but every loan is different.
When it comes to mortgage points, remember:
- Paying mortgage points requires cash up front (1 point = 1% of loan value) but reduces the interest rate on your mortgage.
- Paying points doesn’t make sense if you think you may move, payoff your mortgage, or refinance in the short-term.
- If you see low mortgage rates that seem too good to be true, read the fine print to see if the rate requires paying points.
How are mortgage interest rates calculated?
Mortgage interest rates are calculated based on many variables including: benchmark interest rates set by the Federal Reserve; economic forces (supply, demand and competition among lenders); the market for mortgage-backed securities; local real estate market factors; loan term; loan amount; loan-to-value ratio (how much money you put down); and, finally, borrow creditworthiness.
Also consider whether the mortgage rate is fixed or variable. A fixed mortgage rate is guaranteed to stay the same for the life of the loan, whereas a variable mortgage rate will adjust periodically based upon changes to the national benchmark interest rate.
How can I get the lowest mortgage rate possible?
The trick to getting the lowest mortgage rate possible is to buy a home when mortgage rates are already low, make a down payment of at least 20 percent, and ensure you have an excellent credit score.
When are mortgage rates lowest?
Unfortunately, there are no reliable rules for what time of the month or what time of the year mortgage rates are lowest. There does, however, seem to be some evidence that Mondays are the best days to lock-in a low mortgage rate.
Locking in a mortgage rate simply means getting a commitment from a lender to issue your mortgage at a particular rate. Keep in mind that you’ll need to complete several steps in order to lock-in your rate, so it’s not as easy as calling a lender and saying “I’ll take that rate.” This is another strong reason to compare mortgage rates frequently with a service like LendingTree and be prepared to work with more than one potential lender.
How does my down payment affect my mortgage rate?
Mortgage rates are linked to the lender’s risk in issuing the loan. Although the chance a borrow defaults on the loan is part of that risk, remember that when you take out a mortgage, it’s the bank that actually owns your home until your loan is paid off. Consequently, the value of your home in relation to the size of your mortgage is an important factor to your lender. This is known as the loan-to-value ratio, or LTV.
Why is mortgage LTV important?
LTV is important because it ensures the lender that it will be able to recoup the money loaned by selling your home in the event you default. Because home values fluctuate based on market movement and the condition of the home, lenders require some cushion between the appraised value of your home and the amount they will lend you. You provide this cushion with your down payment.
Decades ago, it was difficult if not impossible to get a mortgage with anything higher than an 80% LTV. That required a 20% down payment. Often, 80% LTV loans are called conventional mortgages because, well, that used to be the convention. Today, putting at least 20% down is still the quickest ticket to a low mortgage rate, although studies show many first-time home buyers aren’t able to come up with that much cash. One study from 2017 shows that, while the average LTV among all mortgages was 79%, among Millennials it was 87%. It also showed that 60% of first-time home buyers put down less than 6%.
What's the smallest mortgage down payment I can make?
There are two federal programs that encourage home ownership by significantly reducing down payment requirements: FHA loans for first-time home buyers and VA loans for U.S. veterans. In the case of VA loans, it’s possible to buy a home with just 2% down.
Even if you don’t qualify for an FHA loan or VA loan, it’s possible to get a mortgage with a small down payment, but your costs will be higher. Not only will you likely pay a higher interest rate, but you may also be required to pay private mortgage insurance, or PMI.
Private mortgage insurance is an additional amount that is tacked onto your monthly mortgage payment for as long as your LTV is higher than 80. When you pay PMI, you are insuring your lender in the event you default and they have to sell your home for less that they loaned you.
How does my credit score affect my mortgage rate?
Not surprisingly, the lowest mortgage rates are available to the borrowers with the best credit scores.
Anyone applying for a mortgage should begin tracking their credit score at least a few months prior and avoid taking on any new credit accounts for at least six months prior.
Although there isn’t a specific cut-off credit score under which it will be more difficult to get a good mortgage rate, it’s safe to say that your score should be at least in the mid-700s to feel confident about snagging the best rate.
It’s also worth noting that getting approved for a mortgage can be tricky if you’re carrying too much debt (even if your credit score is relatively good). That’s because banks take into account your total monthly debt obligations when deciding how much to lend to you. On average, the cutoff is about 40% of your gross monthly income. That means that the sum of your new mortgage payment and your existing debt payments (credit cards, student loans, auto loans) cannot exceed 40% of your pre-tax monthly income.
