Mortgage rates have shifted since last week and month, but the changes aren’t significant. Rates are still at all-time lows, and you can probably lock in a 30-year mortgage rate well under 3.5%.
If you’re ready to buy or refinance, you’ll probably want a fixed-rate mortgage rather than an adjustable-rate mortgage. A 7/1 ARM rate is starting around 0.5% higher than a 30-year fixed rate right now, and by choosing a fixed rate, you will lock in a significantly lower rate for the entire life of your mortgage.
What is a mortgage rate?
A mortgage rate is the interest you pay on the money you borrow from a lender to buy or refinance your home. It’s basically the fee you pay for borrowing, expressed as a percentage. For example, you may take out a $200,000 mortgage, plus a 2.75% interest rate.
There are two types of mortgage rates: fixed and adjustable.
A fixed-rate mortgage locks in your rate for the entire length of your mortgage. Even if rates in the US market increase or decrease, your rate will stay the same. This is an especially great deal right now, as rates are at historic lows.
An adjustable-rate mortgage keeps your rate the same for a predetermined amount of time, then changes it periodically. A 10/1 ARM locks in your rate for the first 10 years, then the rate fluctuates once per year. This is a riskier approach these days, because ARM rates are starting higher than fixed rates, and you risk your rate going up later.
How are mortgage rates determined?
Mortgage rates are determined by a combination of factors — some you can control, and some you can’t.
The main external factor is the economy. Interest rates tend to be higher when the US economy is thriving and lower when it’s struggling. The two main economic factors that impact mortgage rates are employment and inflation. When employment numbers and inflation go up, mortgage rates tend to increase.
The COVID-19 pandemic has hurt the US economy. The country has made some strides over the past few months, but mortgage rates probably won’t spike until there are longer-term improvements.
Finally, your mortgage rate relies on what type of mortgage you get. Government-backed mortgages (like FHA, VA, and USDA loans) charge the lowest rates, while jumbo mortgages charge the highest rates. You’ll also get a lower rate with a shorter mortgage term.
What credit score do you need for a mortgage?
Each type of mortgage has a different minimum credit score requirement. Here’s how it typically breaks down:
- Conforming: 620
- Jumbo: 700
- FHA: 580 (or 500 if you have at least a 10% down payment)
- VA: 640
- USDA: 640
These are just the general rules of thumb, though. Each lender has the right to require a higher or lower credit score. (Although the FHA minimums listed here are the lowest a lender will allow.)
If your credit score is higher than the minimum a lender requires, you could get a better mortgage interest rate.
Laura Grace Tarpley, CEPF
Editor, Banking & Mortgages
Laura Grace Tarpley is an editor at Insider, responsible for banking and mortgage coverage on Personal Finance Insider. She covers mortgage rates, refinance rates, lenders, bank accounts, and borrowing and savings tips. She is also a Certified Educator in Personal Finance (CEPF). Before joining the Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU. You can reach Laura Grace at email@example.com.
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