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What's in a Rate?


You‘ll hear a lot in the coming months about rising interest rates, especially mortgage rates. For years, interest rates in general and mortgage rates specifically have hovered at historic lows. There is reason to believe that is about to change.

The Mortgage Bankers Association expects the 30-year fixed-rate mortgage will average an annual percentage rate of 4.7% by the end of 2017; the National Association of Realtors predicts that same rate will average 4.6%.

Those numbers are averages, though. What rate can you expect to pay if you decide to buy a house or refinance your existing mortgage? The answer is an unsatisfying “it depends.”

Your interest rate is determined by many factors. Some apply directly to you and others do not. For instance, mortgage rates are tied most closely to the yield on the 10-year treasury bond. When yields are going up, typically interest rates on mortgages follow. But what other factors determine the rate you personally might pay?

Credit Score. Your credit score has a major impact on the rate you pay for just about any loan. A lower score indicates a higher degree of risk for the lender, so you are likely to pay a higher rate. The opposite is also true, of course. The higher your score, the less risky you are as a borrower and the lower the rate you’ll pay.

Down Payment. There are a number of different programs available to borrowers these days, including a mortgage to finance up to 100% of the price of your home. These may be great for people who can afford to buy a house but may not have the down payment saved up. By and large, though, a significant down payment reduces the total amount you have to borrow and can lower the total interest you pay over the life of the loan.

Loan Term. Generally shorter terms come with lower interest rates, so a 15-year fixed rate will likely be lower than a 30-year. And while shorter-term loans come with higher monthly payments they also can save you a sizeable amount of money over the life of the loan.

Interest Rate Type. The two most common interest rate types are fixed-rate and adjustable rate. A fixed-rate loan, as you might guess, stays the same for the entire term. An adjustable rate loan usually has a set period in the beginning (typically 3, 5 or 7 years) where the interest rate stays the same and then changes at set times, after that. ARMs, as they are called, are great if you expect to be in the house for only a few years because they come with a lower interest rate and lower monthly payments. Fixed rates are better if you plan to remain in the house because they aren’t affected by fluctuations in the market.

Loan Type. There are many different loan programs available, especially for first-time buyers. There are conventional loans, FHA and VA loans, which are backed by various government agencies. Some, like the FHA loan program, were created to help first-time home buyers.

So many choices. To help you better understand the entire home-buying process, we’ve put together an e-book — Tips From a Lender: A Homebuyer's Guide. It’s a great resource for anyone in the market, but especially for first-time home buyers. You can get your own copy here.

Download a Homebuyer's Guide e-book!

Of course, the best way to answer any questions you have about your specific situation is to speak with a mortgage specialist.

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