Securing a mortgage for your next home purchase can be an overwhelming process. While we can’t give you a full course on mortgages in just one quick blog entry, we can give you a pretty good and thorough introduction. Keep reading for an overview on all things mortgage and mortgage rates:
Fixed Rate vs. Adjustable Rate Mortgages
A fixed rate mortgage carries the same interest rate over the lifetime of the loan, regardless of whether mortgage rates increase or decrease. This type of loan is popular with homeowners who expect to stay in their home for a while and don’t want any surprises over the lifetime of their loan. You’ll find fixed rate mortgages most commonly in loan lengths of 15 and 30 years while other lenders may offer 10, 20 and even 40-year mortgages as well.
The adjustable rate mortgage is generally more popular when mortgage rates are high. They offer a lower interest rate than fixed rate mortgages, but after a set amount of time, the interest rate then adjusts to the current market rate, which can be higher or lower. This type of loan is frequently used by people who don’t plan to stay in their homes past the fixed rate period of time, or they may make plans to refinance within that period. 1, 5 and 10-year ARMs are the most common types of this mortgage.
The Importance of a Low Interest Rate
Mortgage rates greatly impact the entire overall cost of your home. For example, on a $200,0000 loan, a 3.5% interest rate on a 30-year loan would result in a payment of $718.47 per month. In the same example, with just a small leap to a 3.75% interest rate, the monthly payment would jump to $740.98 per month. While that’s just a $22.51 difference per month, that equates to an $8,103.60 difference over the 30-year lifetime of the loan. In summary, even small differences in a mortgage rate can equal huge differences over time.
A Brief History of Interest Rates
In order to understand where interest rates are heading, it’s important to understand where they’ve been. As a whole, interest rates have stayed low over the course of the past century. In the early 1980’s, interest rates soared to almost 18% when inflation raged unchecked, but eventually interest rates settled to a more typical sub-10% by the 1990’s. When the housing market imploded around 2007 and 2008, interest rates dipped into the 2-3% range, marking the lowest interest rates ever. While today’s rates may feel high as compared to the last decade, in reality, they’re beginning to creep back up to what we would consider an average.
The Future of the Interest Rate
The Mortgage Bankers Association recently met for their annual meeting and discussed the future of mortgage rates over the next few years. Mortgage rates are continuing to rise, with expectations that we could be see mid-4 %s next year and then above 5% in 2019 and beyond. Because of this, refinances are expected to drop. But housing prices can’t continue to grow at this remarkable rate as the gap between earnings and housing prices continues to grow so we expect that housing prices will stabilize although not fall.