Mortgage rates keep fluctuating and if you’re looking to buy or sell a home, or refinance, understanding interest rates has never been more relevant (FYI: Mortgage rates for 30-year fixed loans rose above 5% in April for the first time in 10 years). How do rates impact the average consumer? Let’s break it down.
When you take out a loan, the amount you borrowed is known as the principal. Interest is what your lender charges for loaning you that principal amount. It can be either a fixed or variable percentage of your mortgage payment.
Who determines the interest rate?
The base rate is determined by the Federal Reserve (sometimes referred to as the Fed), the central bank of the United States that helps keep financial markets stable. When the demand for goods is high (e.g., soaring housing market), interest rates are high, and in times of financial crisis (e.g., COVID pandemic), interest rates are lower.
- Mortgage-backed securities: When you get a mortgage from a lender, the lender sells that debt to third parties known as mortgage aggregators that bundle and repackage the debt. Those mortgage-backed securities then get sold off as shares. Your mortgage interest rate is determined by the price your debt is sold to the aggregators and what investors are willing to pay for the shares.
- State of the economy: In a weak economy, the Federal lowers the rate to encourage more borrowing. In a strong economy, the rate is higher to encourage people spend less to prevent inflation. When inflation is high, investors are less likely to buy mortgage-backed securities.
- Risk of lending: Mortgage companies also consider the risk of the borrower. People with high credit scores, good financial history, and a lot of assets typically get lower interest rates than those with debt and past bankruptcies.
Are credit card interest rates different?
Yes; when looking at these two types of rates, it’s important to know mortgage loans could factor origination fees, mortgage points, and other charges into your annual percentage rate (APR), which can slightly increase the rate you’re initially given.
Credit card APRs, however, are typically interest-based, and although you may incur yearly or late fees on certain credit cards, issuers don’t usually factor these into your overall rate. Also, for comparison, at 16.45%, the average APR on credit cards is much higher than a mortgage rate on a 30-year fixed loan.
However, just like with mortgage interest rates, someone with a good credit history can be offered a better APR than someone who applies for a credit card with a lower score.
Reach out to a Wyndham Capital loan officer today to learn more about rates and how we can help you find your next home.