Mortgage Rates

Mortgage Rates by State

Mortgage Rates

A mortgage rate is expressed as a percentage of the loan balance and it is typically calculated on an annual basis. A mortgage loan may have a fixed mortgage rate or an adjustable mortgage rate. In general, the lower your mortgage rate is, the less you will pay over the life of the loan.

Fixed Mortgage Rates

A fixed-rate mortgage (also called a “fixed-interest mortgage”) has a predetermined interest rate that stays the same throughout the life of the loan. Because the mortgage rate doesn’t change, the monthly mortgage payments don’t change either. Fixed mortgage rates are popular because they offer borrowers the stability of an unchanging monthly payment amount. In general, the shorter the loan term is, the lower the mortgage rates will be. For example, a 15-year fixed mortgage will likely have a lower mortgage rate (than a 30-year fixed mortgage) because the lender is taking a lower risk on long-term inflation.

Adjustable Mortgage Rates

An adjustable-rate mortgage (ARM) has an interest rate that adjusts periodically (monthly, quarterly, or annually) based on current market rates. With ARMs, lenders can offer low initial mortgage rates in exchange for sharing the future risk of higher rates with the borrower. ARMs are best for people who need affordable payments in the beginning, but can handle the risk of rising payments in the future.

Balloon Mortgage Rates

A balloon-payment mortgage starts off with low mortgage rates and small monthly payments. After a certain period (usually five to seven years), the payments will “balloon” and the borrower must pay the remaining loan balance in-full — or refinance the loan. Balloon mortgages are usually offered as short-term fixed-rate loans, although some come with adjustable mortgage rates.

Interest-Only Mortgage Rates

An interest-only (I-O) mortgage allows the borrower to pay only interest for a specified period of time. After that, the payments adjust to include both principal and interest for the rest of the loan term. This results in small monthly payments during the early years, but bigger payments later on. I-O mortgages generally come with higher mortgage rates because they pose a higher risk to lenders.

Jumbo Mortgage Rates

A jumbo mortgage is a loan that’s considered non-conforming because it exceeds the purchasing limit set by the housing GSEs, Fannie Mae and Freddie Mac. Since jumbo mortgages are too large to be bought and repackaged by the GSEs, any lender that issues a jumbo loan must hold onto the debt themselves. This, plus the larger-than-average loan amount, creates a huge risk for the lender. Therefore, jumbo loans often come with higher mortgage rates and require larger down payments.

FHA Mortgage Rates

FHA loans are managed by the Federal Housing Administration. The FHA does not issue loans — it provides mortgage insurance on loans made by FHA-approved lenders, protecting them against losses if a borrowers fails to repay their debt. The FHA has a variety of home loan programs. Each type of FHA loan is different and must be applied for separately. These programs include fixed-rate mortgages, adjustable-rate mortgages, energy efficient mortgages, home equity mortgages, and reverse mortgages.

How Mortgage Rates Are Determined

For many mortgage loans, the interest rate depends on the performance of a major mortgage index. While there are many different mortgage indexes used by lenders throughout the world, the following five indexes are the most commonly used in the United States: Prime Rate (the Federal Reserve’s U.S. Prime Interest Rate), LIBOR (London Interbank Offered Rate), COFI (11th District Cost of Funds Index), CMT (Constant-Maturity Treasury), and MTA (12-Month Treasury Average).

How to Get the Best Mortgage Rates

Because a lower mortgage rate can potentially save you thousands of dollars, it’s important to understand how to secure the best mortgage rate. The mortgage rate you obtain will depend on the loan amount, your strength as a borrower, as well as the type of loan and the length of the loan. To get the best mortgage rate, you will generally need excellent credit, steady employment, and a healthy down payment (20% is ideal).

It is recommended that homebuyers shop around for the best mortgage rates. Visit three to five different lenders to see what they offer and compare their loan products to make an informed decision. It’s also a good idea to keep an eye on market trends, as mortgage rates tend to fluctuate with the state of the economy.