If you’re embarking on the home-buying journey, a mortgage will almost certainly be a part of it. This will likely be the largest loan you ever take on, and making the wrong choice could prove costly for years to come. This article will demystify the various mortgage types and guide you through the selection process. Afterward, our regularly updated best mortgage rates tables can help you pinpoint the ideal lender.
Key Insights
- Mortgage rates aren’t uniform; they fluctuate based on the lender and the specific loan type.
- Fixed-rate mortgages maintain the same interest rate for their entire duration, while adjustable-rate mortgages (ARMs) can see their rates increase or decrease after an initial period.
- Government-backed mortgages can sometimes offer attractive rates and other beneficial terms.
- Your credit score, down payment amount, and whether you pay upfront “points” can all influence the interest rate lenders offer.
Understanding Mortgage Rates
The cost of your mortgage primarily begins with the interest rate you’ll be charged. Knowing the prevailing rates for different mortgage types will help you determine your borrowing capacity and, by extension, how expensive a home you can realistically afford. A mortgage calculator can simplify these calculations for you.
Calculating Your Monthly Payment
Your monthly mortgage payment will vary depending on your home’s price, your down payment, the loan term, property taxes, homeowners insurance, and the loan’s interest rate (which is significantly influenced by your credit score). Use the inputs below to get a rough idea of what your monthly mortgage payment might be.
Mortgage Rate Examples
The mortgage rates below were collected online from major banks in early October 2023 and are for illustrative purposes only. For the most current rates, please consult Investopedia’s best mortgage rates tables. In the table, “Rate” refers to the basic interest rate, while “APR” (Annual Percentage Rate) encompasses all fees and charges, providing a more accurate representation of your actual cost. You should primarily focus on the APR.
30-Year Mortgage Rate Example
| Term | Rate | APR |
| 30-year fixed | 7.750% | 7.997% |
| 30-year fixed FHA | 7.125% | 8.041% |
| 30-year fixed VA | 7.125% | 7.508% |
| 30-year fixed jumbo | 7.500% | 7.658% |
15-Year Mortgage Rate Example
| Term | Rate | APR |
| 15-year fixed | 7.000% | 7.316% |
| 15-year fixed VA | 6.625% | 7.512% |
| 15-year fixed jumbo | 7.250% | 7.502% |
Adjustable Rate Mortgage (ARM) Example
| Term | Rate | APR |
| 10/6 ARM* | 7.000% | 7.534% |
| 7/6 ARM | 6.750% | 7.561% |
| 5/6 ARM | 6.625% | 7.227% |
*ARM rates are presented as a fixed term (during which the interest rate remains constant), followed by how frequently the rate can adjust thereafter. For instance, a 10/6 ARM has a fixed rate for the initial 10 years, after which the rate can be reset every six months.
Fixed vs. Adjustable Mortgages
Mortgages fundamentally come in two forms: fixed-rate and adjustable-rate. Each has distinct advantages and disadvantages, depending on your personal circumstances.
Fixed-rate mortgages are exactly what their name implies: their interest rate stays the same for the entire duration of the loan, whether that’s 15 or 30 years. The primary benefit of a fixed-rate loan is its predictability: you won’t face higher payments if overall interest rates climb. These are often a solid choice for individuals planning to remain in their homes for many years. On the flip side, fixed-rate mortgages typically start with a higher interest rate compared to their adjustable-rate counterparts.
Adjustable-rate mortgages (ARMs) usually feature a very attractive introductory rate. However, after a specific period, the rate can change according to the loan’s terms. In the examples above, the rate holds steady for 10, seven, or five years, then adjusts every six months. (ARMs are available with numerous other fixed-period lengths and adjustment intervals.)
Each ARM is pegged to a particular benchmark index, such as the Secured Overnight Financing Rate (SOFR). For example, if the index rises to 7% and the lender adds a margin of 3%, your interest rate could jump to 10%. Conversely, if the index falls, your interest rate would decrease as well.
The inherent risk with an ARM is the possibility that if interest rates surge significantly by the time your mortgage begins to adjust, you could face a substantial—and potentially unaffordable—increase in your monthly payment. However, many loans include annual and lifetime caps on rate increases, offering some protection. For this reason, ARMs are often best suited for those who anticipate moving within a certain number of years, before the initial fixed rate expires.
It’s worth noting that your choice between a fixed and adjustable-rate mortgage isn’t set in stone for life. You always have the option to refinance either type into the other, or into the same type, especially if interest rates drop and you can secure a better deal.
Other Factors Influencing Your Mortgage Rate
Beyond the choice between a fixed or adjustable loan, several other elements can impact your mortgage rate:
- The lender and loan program: Mortgage rates will vary from one lender to another, even for the same type of loan, making comparison shopping essential. Additionally, different loan programs offer distinct rates, and a single lender might participate in multiple programs, expanding your options.
- Conforming loans are the most widely available. Banks and other lenders issue them, but they are typically purchased by Freddie Mac or Fannie Mae (US government-sponsored enterprises that buy and bundle loans into mortgage-backed securities for investors). Conforming loans generally have lower interest rates than nonconforming loans, such as jumbo loans.
- Lenders also offer government-guaranteed loans, including FHA loans (insured by the Federal Housing Administration), USDA loans (insured by the U.S. Department of Agriculture), and VA loans (insured by the Department of Veterans Affairs). If you qualify for one of these programs, you might secure a better rate than you would on a standard mortgage, along with a lower required down payment.
- Your credit: Lenders typically extend better rates to borrowers with strong credit histories and high credit scores. Therefore, it’s wise to check your credit score and credit reports before applying so you understand your standing. If possible, take steps to improve your credit score in the interim, such as maintaining a low credit utilization ratio and correcting any errors you find on your reports.
- How to view your credit report: You can obtain a free copy of your credit report annually from each of the three major credit bureaus—Equifax, Experian, and TransUnion—at AnnualCreditReport.com. This website also explains how to dispute any errors you discover.
- How to find your credit score: Many banks, credit card companies, and online sources offer free access to your credit score. Be aware that various credit scoring models exist, so you likely have multiple scores, and the one you retrieve might not match all others. However, it should give you a clear indication of whether your score is ready for a mortgage application or if it needs improvement.
- Your down payment size: Generally, the larger your down payment, the better the interest rate lenders may offer. This is because a higher down payment reduces their risk. Making as substantial a down payment as you can afford offers other benefits too. Firstly, you’ll borrow less money, decreasing the total interest you’ll owe over the loan’s life. Secondly, down payments under 20% often necessitate paying for private mortgage insurance (PMI) each month until your equity in the home reaches 20%.
- Paying points: Many lenders will offer you a lower interest rate if you pay “points” (sometimes called discount points) upfront. Each point is equivalent to 1% of the mortgage amount—for example, $1,000 on a $100,000 mortgage. If you have the available cash, paying points can reduce both your monthly loan payments and the total interest you’ll pay over the mortgage term.
The Bottom Line
Mortgage interest rates can vary considerably, influenced by the lender, the specific loan type, and a host of other factors. Once you’ve determined the type of loan that aligns with your needs, diligently shop around for the most favorable interest rates and terms. And remember, if your circumstances change down the road, you may always have the option to refinance into a different loan that better suits your evolving financial situation.