Primary Mortgage Market Survey® data provided by Freddie Mac
What is a Mortgage?
A Mortgage is a loan used to purchase, refinance, or borrow against a home. There are "First Mortgages" and "Second Mortgages," the former designed to allow you to purchase the home or totally refinance the original loan; the latter, also known as a Home Equity Loan, allows you to use your available equity to take out a subordinate loan in addition to your First Mortgage. This section and the average rate chart refer only to First Mortgages.
How to Read the Average Rate Chart
Locking in your mortgage rate when rates are low, whether it's a fixed rate or an adjustable rate that won't adjust for a while, can mean a world of difference to your monthly payment. Even a quarter of a percent will most certainly be noticeable. So Credit Karma's Mortgage rate chart shows you the current rate trends for several different loans.
Are the rates lower now than they've been in a while? Maybe it's time to pull the trigger on that loan. Are they high and still climbing? Maybe you should wait it out for a while if possible. Of course, this chart is just one piece of the overall puzzle, and closing costs and other fees should definitely be taken into account as well.
If you are thinking of buying a home, use this chart as a point of reference, but make sure to talk to a qualified home loan consultant or agent about your options and the best time for you to buy.
These are the major factors taken into consideration, both by the prospective buyer and by the lender:
Annual percentage rate
This is the rate at which your outstanding balance (the principal) will be charged on a yearly basis. The APR you qualify for will depend largely on your credit score, the issuer, and the going market rate for that type of loan. Mortgage rates are typically dependant on the U.S. Prime Rate, in turn dependant on the Federal Funds rate set by the Federal Reserve. The "T-bill" Treasury Index is also used.
Fixed vs. adjustable (ARM) rates
A fixed-rate mortgage is one that will hold the same rate for the entire life of the loan, meaning your monthly payments will never change. An adjustable-rate mortgage, commonly referred to as an ARM, may start off with a fixed rate for a specified amount of time (one to five years is common) but will then adjust to the market index and continue to adjust on a regular schedule—either up or down. Often, the APR on an adjustable-rate mortgage will be as much as one to two percent lower than a fixed-rate mortgage of a similar term for the period in which the ARM is fixed. However, once the rate adjusts it will increase, sometimes drastically.
Fixed mortgage terms can go as high as 40 years but the most common loans are set for 30 and 15 years. Like auto loans, usually the shorter the term, the lower the rate. ARMs can follow the same length terms (though obviously the rate adjusts periodically) and both fixed and adjustable can be what's known as a "balloon," in which the payments and interest costs are calculated for the entire life of the loan but the principal is due in full at some point well before then. For example, a "40 due in 7" fixed-rate balloon would involve calculating the payments on a 40-year loan and that dictates your monthly payment for seven years. At the end of seven years, however, the entire remaining balance would be due, at which point most people simply refinance the entire amount into whatever mortgage option is best at the time.
Loan to value & down payment
The loan to value is the size of the downpayment as a percentage of the entire amount of the loan. So a $100,000 down payment on a $500,000 loan, 20% of the total, would be expressed as "80% loan to value." The higher the loan to value number, the riskier the loan is considered by lenders and the higher your rate may be, or you may need to purchase Private Mortgage Insurance (PMI) until you reach a predetermined LTV.
Different lenders have different rules about whether or not you are permitted to pay your loan off at a faster rate than set forth by the agreed upon term. Prepayment penalties are common but still may be less than the interest you would accrue by continue to pay the loan off at the current pace. Talk to your lender in advance about this issue if you think you might eventually want to pay off your loan early.
Closing costs & other fees
Again, depending on the lender, your closing costs and fees may vary considerably. These are the costs of the loan and usually the fees are rolled into the loan total. This is why you'll often see a home loan "rate" and then the home loan "APR" and they will be different. The rate is the base rate without the closing costs and fees built in, the APR is everything bundled together, which is why it may be a bit higher.
The biggest benefit of a mortgage loan? You get a place to call your own. No more renting and dealing with landlords; it's your place and you get to live exactly how you want to live.
From a financial standpoint, assuming the mortgage payments aren't completely tapping you out, you will also enjoy the tax benefits that come with owning a home. In most cases, the interest or possibly the entire monthly payment is deductible from your federal income tax. Do consult a tax professional for the precise details of your situation.
A home also means home equity, which can be used in the future to secure other loans—to help do repairs, remodel, landscape, even pay your child's college expenses. And if the housing market is flourishing, your investment may pay off big-time if the value of your home increases (as most will).
As evidenced by the current "sub-prime mortgage crisis," not being able to pay your mortgage will eventually result in foreclosure, which is both disheartening and very detrimental to your credit score.
Be careful not to buy more house than you can afford, and be especially careful when it comes to Adjustable-rate loan options. The initial low rate may be tempting, but consider just how much your monthly payments could increase when the rate does finally adjust. Will you be able to swing it? You might be able to refinance at that time but if rates are high across the board that may not even prove to be a viable option.
Buying a home is a huge undertaking, and the rewards can be numerous and amazing, but take your time in reviewing your current financial situation before making the jump. Know all your options and pick the one that's best for you, now and in the future.
Where to go for a Mortgage
Shop around! Your local banks and credit unions will almost all have mortgage loans available and you may be surprised just how much the rates and associated costs and fees may differ. You can also do a fair amount of comparison shopping online—and even apply for a pre-approval online from certain lenders.