There are an onslaught of costs that come with buying a home. Chief among them, of course, is the mortgage that you’ll need to sign before getting your set of shiny new house keys. Tracking real estate and mortgage rate trends can be a fickle business, but it’s important to know those interest rates to make sure you’re getting the best deal possible. After all, you’ll be spending the next 15 to 30 years making payments on that loan, so it’s a good idea to know as much as you can.
Interest rates: How they work
Like most loans, mortgage rates are tied directly to what’s happening in the rest of the financial markets. “Mortgage rates are largely dictated by moves in the bond market. And, less so, at the whim of individual lenders,” explained Greg McBride, chief financial analyst for Bankrate. Because of that, the interest rate that you’ll be charged for the loan on your home can change even on a weekly basis. “Financial markets are constantly in flux,” McBride said in an interview with The Cheat Sheet. “And that’s the primary influence on mortgage rates.”
For example, McBride pointed out, mortgage rates fluctuated wildly in the weeks leading up to the Brexit vote, in which citizens of the United Kingdom voted to leave the European Union. Uncertainty about how the divide will affect the euro causes financial experts to lose sleep, and as a result the the market acted like a ping pong ball, bouncing up and down with alternating hopeful and dismal market predictions.
Ultimately, mortgage rates reflect how risky the lender believes that particular loan will be. When other factors are held constant, you’ll have a lower interest rate on a 15-year mortgage than a 30-year mortgage. The monthly payments will be higher overall, but the lender is more likely to get their money back faster. As a result, you’re more likely to get a lower rate and pay less in interest overall.
Mortgage rate trends for 2016, 2017
When it comes to predicting mortgage rate trends, financial experts are in good company with meteorologists and fortune tellers. “They [rates] are notoriously difficult to predict,” McBride said. “I include myself in that.” For instance, mortgage rates were generally expected to rise through most of 2016, but now McBride said it’s just as likely that interest rates will end at a lower rate than when the year began.
“This was a year where the expectation was that we were going to see the Federal Reserve continue to raise interest rates, inflation was going to move a bit higher, and that we were going to see — as a result of that — long-term interest rates moves higher,” McBride said. Instead, the Fed didn’t budge on raising interest rates, inflation remained fairly flat, and the economy on the whole was more sluggish than predicted. As a result, mortgage rates didn’t rise: they fell.
In fact, interest rates on 30-year fixed-rate mortgages are the lowest since levels in 2013, which has the lowest interest rates in the past 45 years. According to a release from Bankrate, the rate for a 30-year mortgage in June 2016 was an average of 3.69%. To put that into context, the average rate in the early 1980s was more like 16%.
As it stands for the next year or so, McBride said he doesn’t expect any major movements where mortgage rates are concerned. “I don’t expect movements in mortgage rates to be anything to lose sleep over,” he said. “Even if they rebound, I think it’s going to be very slight.”
This is a good thing for most consumers, McBride added. New homebuyers can secure a mortgage at almost-historically low rates, and people hoping to sell their home will benefit from having more potential customers be able to afford purchasing their property.
Getting the best mortgage rate: How to save the most money
How are you supposed to get the best mortgage rate, if the percentages fluctuate on a weekly basis? When you’re in the final stages of securing a mortgage, McBride said it can be important to watch those rates closely to lock in the lowest one possible. The same is true if you’re actively looking to refinance. Otherwise, he said, there are other factors that you should be focusing on.
For instance, you’ll also get a more favorable mortgage rate if the rest of your finances are in order. “Make sure that your credit is as clean as it can be, pay down or pay off other outstanding debts, make sure that you have adequate proof of income, and save up money for the down payment rate,” McBride advised. If you can pay more money up front, for instance, you’ll need to borrow less money, and be a less risky candidate for your lender. The larger percentage of the home value you need to borrow, the higher your interest rate is likely to be. “That’s a slightly riskier loan because you don’t have as much skin in the game,” McBride explained.
Large-scale factors like economic markets and the actions of the Federal Reserve will affect all interest rate trends, but McBride stressed that it’s important to compare prices from one lender to another. “In terms of getting that better rate, it’s important to shop around. Not everybody charges the same rate,” he said. Bankrate constantly updates the rates for lenders in 650 markets across the country, which can give you a starting point. Compare those to the rate you’re offered at your home bank, and also compare them to the rates at local credit unions and other financial institutions. When it comes to saving the most money possible on what is likely the biggest purchase of your life, it’s vital to cast the widest net possible.