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Mortgage rates ticked up this week, topping 7% for the first time this year, a discouraging trend amid the spring home-buying season.
A huge indicator of when mortgage rates will go down is when the Federal Reserve lowers the federal funds rate. Although the Fed’s rate doesn’t directly impact mortgage rates, it is a sign of how the U.S. economy is performing, and mortgage rates tend to follow suit — if the Fed rate goes down, mortgage rates probably will, too.
The Fed is waiting to drop its rate until inflation is closer to the central bank’s target of 2%. But going by the latest Consumer Price Index (CPI) data for March, let’s just say things aren’t looking too good for mortgage rates.
March’s inflation rate was 3.5% year over year, which was three basis points higher than the previous month’s year-over-year inflation rate and exceeded economists’ expectations. If inflation doesn’t drop, the Fed is less likely to decrease its rate. Until that day comes, don’t expect significant drops in mortgage rates.
If you’re financially ready to buy a house now, you may want to go ahead and start the process rather than wait for lower rates. Remember, you may be able to refinance into a lower rate a few years down the road.
Today’s mortgage rates
According to Freddie Mac, the national average 30-year mortgage fixed rate is 7.10%. This is a significant increase from last week, when the rate was 6.88%.
The average 15-year fixed mortgage rose, too. The 15-year rate is 6.39%, up from last week’s 6.16%.
How do mortgage rates work?
A mortgage interest rate is a fee for borrowing money from your lender, expressed as a percentage. There are two basic types of mortgage rates: fixed rates and adjustable rates.
A fixed rate is locked in for the entire life of your loan. For example, if you get a 30-year mortgage with a 7% interest rate, your rate will stay at 7% for the entire 30 years. (Unless you refinance or sell the home.)
An adjustable-rate mortgage keeps your rate the same for the first few years, then changes it periodically. Let’s say you get a 5/1 ARM with an introductory rate of 6%. Your rate would be 6% for the first five years, then the rate would go up or down once per year for the last 25 years of your term. Whether your rate increases or decreases depends on several factors, such as the economy and housing market.
At the beginning of your mortgage term, most of your monthly payment goes toward interest. As time goes on, less of your payment goes toward interest, and more goes toward the mortgage principal or the amount you originally borrowed.
Learn more: 5 strategies to get the lowest mortgage rates
What factors impact your mortgage rate?
There are two categories of factors that affect your mortgage rate: ones you can control and ones you cannot control.
What factors can you control? First, you can compare the best mortgage lenders to find the one that gives you the lowest rate and fees.
Second, lenders typically extend lower rates to people with higher credit scores, lower debt-to-income ratios, and considerable down payments. If you can save more or pay down debt, a lender will probably give you a better mortgage rate.
What factors can you not control? In short, the economy.
We could probably write a book about how the economy impacts mortgage rates, but here are the basic details. If the economy — think housing supply/demand and employment rates, for example — is struggling, mortgage rates go down to encourage borrowing, which helps boost the economy. If the economy is strong, mortgage rates go up to temper spending.
Dig deeper: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
30-year vs. 15-year fixed mortgage rates
Two of the most common mortgage terms are 30-year and 15-year fixed-rate mortgages. Both lock in your rate for the entire loan term.
A 30-year mortgage is popular because it has relatively low monthly payments. But it comes with a higher interest rate than shorter terms, and because you’re accumulating interest for three decades, you’ll pay a lot of interest in the long run.
A 15-year mortgage can be great because it has a lower rate than you’ll get with longer terms, you’ll pay less in interest over the years, and you’ll pay off your mortgage much sooner. But because you’re paying off the same loan amount in half the time, your monthly payments will be higher.
Basically, 30-year mortgages are cheaper from month to month, while 15-year mortgages are cheaper in the long run.