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How Do Mortgage Interest Rates Work?

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mortgage rates

Mortgage rates today remain historically low, but that could soon come to an end as the Federal Reserve begins to raise interest rates. Here is a closer look at some of the the questions people have about how mortgage interest rates work.

What Is the Interest Rate on Home Loans?

Home mortgage rates are the interest that you pay to the bank for the privilege of using its money to purchase a home. If you buy a home with your own cash, then you will pay no interest rate to a bank. You may also be able to avoid fixed closing costs. However, most people choose to take on a mortgage and the associated monthly payments because of affordability and the opportunities to build wealth through a slower payment structure.

Interest rates can be different on the same piece of property based upon the following factors:

  • The time frame for paying back the loan (usually 10, 15 or 30 years)
  • The amount of money borrowed (Houses above a jumbo loan threshold usually have higher interest rates associated with them)
  • The presence of a cosigner if one is required
  • Whether the purchase is the first residential home that a person is buying
  • The amount of points that a borrower is willing to purchase on a mortgage
  • The location of the property
  • Whether the loan is fixed or variable
  • The amount of money that is paid up front as a cash down payment
  • The credit score of the borrower (740+ receives the lowest interest and refinance rates)

Keep in mind that it’s a good idea to check your credit scores before you begin searching for a home or trying to pre-qualify for a mortgage. You can get your two free credit scores at With these two completely free scores, you’ll also have access to a tool that shows you how your payment history, debt and other factors are affecting your scores, and you’ll get recommendations for steps you may want to consider to address any problems. And, in case you were wondering, checking your own credit reports and scores does not affect your credit in any way.

What Is a Good Interest Rate on a Home Loan?

A good interest rate on a home loan is a loan that is not far above the prime rate. The prime rate is the rate at which banks borrow money from each other. No bank will give a borrower a mortgage at an interest rate that is at or below the prime rate because it is not profitable for them. You can compare mortgage rates using’s mortgage rate calculator.

How Do Rates for VA Home Loans Compare?

Average loan rates for VA loans are usually lower than those for comparable conventional loans. A borrower that qualifies for a VA home loan may also be able to achieve a lower interest rate even with a lower credit score and a higher debt-to-income ratio than a conventional borrower.

VA home loans have an additional advantage over a conventional loan: exclusion from any private mortgage insurance or PMI. Borrowers who put down less than 20% of the total value of the home as a down payment may be required by the creditor to pay PMI, which helps to protect the bank from losing money in case of a borrower default and may add anywhere from 1% to 2% to the overall interest rate that a borrower pays per year.

What Is a 30-year Fixed-Rate Mortgage?

A 30-year fixed-rate mortgage is the default rate that you will see presented in advertisements. If there are no terms associated with an advertised mortgage rate, you can usually assume that it is a 30-year fixed-rate mortgage. These mortgages are the most popular, in part because the long timeline assures a lower monthly payment than for 10- or 15-year mortgages. The fixed rate ensures that the amount of interest due for each payment never changes no matter the outside market forces.

What Is an Adjustable-Rate Mortgage?

By comparison, an adjustable-rate mortgage or ARM has the ability to change based on market forces. The original interest rate may be lower than for a fixed-rate mortgage, but rising prime rates can end up meaning higher interest rates over the life of the mortgage. It can be a good option, however, if are fairly certain interest rates will not rise or if you do not plan to stay in the home for the life of the mortgage.

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