Cash News
Fixed mortgage rates are finally falling, and we might have inflation to thank for the second consecutive week of decreases.
Yesterday, the U.S. Bureau of Labor Statistics released the April Consumer Price Index (CPI). The report showed that inflation rose 0.3% month over month and 3.4% since last April. This is an improvement from the March report, which showed inflation increasing 0.4% from the previous month and 3.5% since a year prior.
Slowing inflation can lead to lower mortgage rates. The Federal Reserve won’t cut the federal funds rate until inflation gets closer to its target rate of 2%. Even though inflation is still above 2%, better inflation numbers can cause mortgage rates to inch down in anticipation of the Fed slashing rates.
If you want to buy a house soon, now could be the time to start actively home shopping. By the time you choose a mortgage lender, find your dream home, and lock in a rate, mortgage rates could be even lower than today.
According to Freddie Mac, the national average 30-year mortgage fixed rate is 7.02%. This is a modest decline from last week’s 7.09%.
The average 15-year fixed mortgage is down too. The 15-year fixed rate is 6.28%, down 10 basis points from last week’s 6.38%.
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 mortgage locks in your rate 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 increase or decrease once per year for the last 25 years of your term. Whether your rate goes up or down 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
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 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
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. You’ll also pay off your mortgage much faster. 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 more affordable from month to month, while 15-year mortgages are cheaper in the long run.