If you’ve even thought about buying a house, you’ve thought about mortgage rates. They’re such a significant part of the home buying process that even people who aren’t seriously thinking about buying for a few years have spent time considering them.
But mortgage rates can be confusing, especially if you’re a first-time homebuyer. Even if you haven’t seriously started looking yet, knowing what mortgage rates are and what influences them can be hugely beneficial.
In this article, you’ll learn about what mortgage rates are, how they’re determined, what influences them, and some tips and tricks for attaining the best rates.
What is a Mortgage Rate?
The phrase “mortgage rate” refers to the interest rate that your lender charges you on a home loan. Most people take out a mortgage, or home loan, because they can’t afford to buy a house outright. And that’s okay! Houses are extremely large purchases, and they’re meant to be lived in for years or even decades – so for most people, taking out a loan makes sense.
Mortgage rates aren’t just for new purchases, however. The term “mortgage rate” refers to the interest on any home loan, whether you are making a new purchase or refinancing the mortgage on your current home.
How are Mortgage Rates Determined?
There are two parts to this: first, how lenders set their mortgage rates; and secondly, how those rates are determined for borrowers.
There are two primary types of mortgages: fixed-rate and adjustable-rate.
Fixed-rate mortgages are generally tied to 10-year Treasury bonds, which are longer-term, more stable investments. If Treasury yields go up, so do mortgage rates; if they go down, mortgage rates go down as well.
Adjustable-rate mortgages are tied to shorter-term indices, sometimes as short as one year, meaning that the rate can change yearly.
What influences mortgage rates?
Mortgages aren’t just tied to financial indices such as Treasury bonds. These are simply used as a starting point. From these starting points, lenders take other factors into account, such as inflation, the unemployment rate, competitor rates, overall demands, and more, to set their advertised rates.