Benjamin Franklin, one of our great founding fathers, famously stated that there are only two things certain in life: death and taxes. Well, interest rates are right up there. Today, they’re proving to be very uncertain. The truth is, for most people looking to buy a home, interest rates are simply something they are going to have to contend with. What’s important is that you make sure you trust your mortgage lender and you understand the terms of the loan. Rocky Mountain Mortgage Company is here to help you.
What Low-Interest Rates Mean for You
There’s a lot of talk these days about jaw-dropping, eyebrow-raising low-interest rates on home loans. But what does it all really mean? Rates have indeed been fluctuating since March, interest rates are now staying below four percent. One only needs to look at the real estate market and how people have flocked to buying homes and refinancing to know that this interest rate is not a joke and seems to have prompted people who may have been uncertain about homeownership before.
Applying for a mortgage loan is a big transaction and many people often find themselves a little overwhelmed at the process and what it all means. So let’s dive into the wonderful world of mortgage interest rates and see what we find!
A Brief History of Mortgage Rate Fluctuations
Since the late 20th century, historical mortgage rates for 30-year fixed loans have fluctuated considerably across the board. Several factors have driven these rates over the past couple of decades. Freddie Mac, a public government-sponsored enterprise that helps Americans with homeownership, has surveyed lenders for the past fifty years and recorded the fluctuation of these rates. In the late seventies and early eighties, high inflation rates pushed 30 year fixed rates to an all-time high of 18.63% in 1981. For comparison purposes, in 1981 a loan of $100,000 at 18.63% meant that your monthly payment would be $1,558.58. The same loan in 2012 at a historic rate of 3.31% meant your payment was $438.51. That’s a big difference! Freddie Mac has predicted that interest rates are expected to hover around 3.8% for at least the rest of 202o. For prospective homebuyers, this means really good news.
So, How are Mortgage Rates Set?
Mortgage rates are driven by a variety of market factors that no one person has any control over. When there are uncertain economic times, this may mean that interest goes down.
How Does the Interest Affect My Monthly Payment?
It’s easy to be misled about your monthly payment with calculators that are not particularly accurate on Zillow or Trulia. Essentially, every month your payment is composed of a couple of different amounts: the amount you borrowed, property taxes, interest, and home insurance (possibly even mortgage insurance). Your mortgage lender will use an amortization formula to come up with a payment schedule.
The Different Types of Rates: Fixed Rates and Adjustable Rates
There are different types of loans and rates that you can choose from, depending on your circumstances and financial situation. The main types of loans lenders tend to offer include:
- Fixed-rate mortgages mean the lender will lock in the interest rate for you and it will remain the same for the life of the loan.
- An adjustable-rate mortgage (ARM) will often be a little lower than the 30-year fixed rate but is subject to change throughout the life of the loan, usually about five years or so. For many, it makes sense that if rates are low enough, refinancing your ARM loan to lock in a low rate can be a smart idea. Even then, most ARMs have a cap on the amount the loan interest can fluctuate.
- Interest-only loans are a rare but available option for some people. These can be slightly riskier, depending on your situation. They have been known, however, to help first-time homebuyers who cannot afford a big payment quite yet and are planning to sell before the payments get really high. This is because the monthly payment is simply going towards the interest and not the principal of the home.
The two most common are the 30-year fixed-rate and the 15-year fixed-rate.
30-year fixed-rate: Monthly payment is lower, but you pay more in interest over the life of the loan. People often choose this for stability and lower payments.
15-year fixed-rate: Monthly payment will be higher because the shorter repayment schedule means increased monthly amounts, but you will save a considerable amount over the life of the loan.
When you put in an offer on a home, the lender will provide you with an estimated payment before they lock in the rate. These will include escrow, property taxes, and homeowner’s insurance, which can fluctuate over time. After the paperwork happens, documentation goes to underwriters, and appraisals are done, then the lender will send you final disclosure agreements that state they have locked in your interest rate. Make sure to pay attention to this number and ensure it is what you were looking for, as these rates are constantly changing.
We’re Here to Help You Make the Right Choice!
Navigating the many different loan terms and changing regulations can get daunting real quick. This is why Rocky Mountain Mortgage Company is here to guide you through the labyrinthine process of obtaining a home loan. We are El Paso’s trusted mortgage lender. There is a great trail of paperwork and documentation and legal stuff that goes into the mortgage process. We take care of that for you, but we want you to understand your loan and what it all means. If you’re getting loan terms you don’t understand, put that calculator away and call us.
