As of today, August 26, the average mortgage rate for a 30-year fixed is 5.5%, rising 0.42% from last week, according to Freddie Mac's Primary Mortgage Market Survey. That's compared to just 3.079% a year ago. The average mortgage rate for a 15-year fixed is 4.85%, and for a 5/1 ARM, it's 4.36.
Amid sky high inflation and a slowdown in economic growth that is hurting consumer confidence and an attendant slowdown in the housing market, mortgage rates are still buoyant in this environment. That's because the Fed boosted its benchmark interest rate 0.75% in June to a range of 2.25% to 2.5%, its largest rate hike since 1994. Experts do expect rates to rise this year as a result of inflation and the Federal Reserve's decision to sunset policies that kept rates low at the outset of the COVID-19 pandemic. The next possible rate hike could come at the Sept. 20-21 meeting, perhaps 50 or 75 basis points.
The Fed may ultimately ratchet up the federal funds rate to 4% to contend with inflation. That would likely send mortgage rates soaring in relative lockstep.
If you're looking to buy a home in a downturn economy, a financial advisor could help you put a financial plan together for your needs and goals.
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What Is a Mortgage Rate?
The mortgage rate is the interest rate a lender will charge on your mortgage, based on your risk profile and the particular market conditions. Fixed mortgage rates stay the same for the duration of your loan. Adjustable mortgage rates fluctuate at regular intervals after initially staying secure for a set amount of time. Mortgage rates affect how much interest a borrower will pay on a monthly basis and over the entire course of the loan.
How Are Mortgage Rates Set?
Mortgage rates are influenced by particular economic factors, including the prime rate, the lowest rate at which banks make loans. The prime rate typically tracks trends that the Federal Reserve's federal funds rate sets.
In addition, because many borrowers pay off their mortgages or refinance after 10 years, even with 30-year loans, the 10-year Treasury bond yield is a good barometer for mortgage rates. As the bond yield goes up, mortgage rates typically rise. As the bond yield decreases, they tend to drop.
How to Shop for Mortgage Rates
Consider both local and national lenders to ensure you're uncovering the best rates.
Don't apply for multiple mortgages at once, lest you have your credit score penalized. Instead, pull your credit report and share it with potential lenders. They should, in turn, provide you with rates to consider.
Use SmartAsset's rate table to examine which lenders are offering the best rates for your credit profile.
What Is a Good Mortgage Rate?
A number of factors determine a mortgage rate, so a good mortgage rate really depends on the individual buyer. Though lenders will inevitably broadcast the best available rates, the size of your down payment, your credit history, your income and outstanding debts will influence the best rate available to you.
All that said, a good mortgage rate for someone with a low credit score may be higher than one for someone with an impressively high credit score.
How Do I Qualify for Better Mortgage Rates?
Scoring a more favorable mortgage rate can conceivably save you tens of thousands of dollars – or more – over the lifetime of the loan. That's why it's important to do everything in your power to improve your chances of getting better terms on your mortgage. Here are some quick tips on how to nab a lower rate:
Boost your credit score. Your credit score is a major factor in determining what rate you'll receive on your mortgage. With a higher score, you'll likely be able to secure a lower mortgage rate. Ensure you're making on-time payments, pay down debts and dispute errors in your credit report.
Increase your down payment. When you put more down on a home, you're essentially lowering the risk the lender takes on for your mortgage. As a result, you'll increase the likelihood of securing favorable terms if you put 20% down instead of 10%.
Reduce your debt-to-income ratio. To determine your debt-to-income ratio, lenders divide your monthly debt obligations by your gross income. Lowering your debt and increasing the amount of money you make will improve your DTI and mark you as less risky of a borrower. As a result, you'll be able to secure a lower mortgage rate.
How Big a Mortgage Can I Afford?
Preventing yourself from biting off more than you can chew is important when it comes to taking out a mortgage. One rule of thumb in determining how much mortgage you can afford is buying a house no more than two to two and a half times your annual salary before taxes. So if you make $200,000 a year, you should be shopping for homes that cost between $400,000 and $500,000. Be sure to use SmartAsset's How Much House Can I Afford? calculator.
Tips for Buying a Home
Whether you are shopping in a seller's market or a buyer's market, a financial advisor could help you create a financial plan for your home buying needs. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
When competing in a seller's market, homebuyers may want to get an edge by securing a mortgage pre-approval.
If you are buying a home when mortgage rates are going up, you may want to buy mortgage points upfront to lower the interest rate on your loan.
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