Today's Mortgage Rates
Who Determines Interest Rates?
Interest rates are typically determined by a central bank in most countries. In the United States, a forum is held once per month for eight months out of the year to determine interest rates. At this time, the economic status of the country is assessed, and interest rates are adjusted according to the needs of the country. The panel that determines interest rates consists of representatives of the Federal Reserve Board and the Federal Reserve Bank. Together, the representatives from both form the Federal Open Market Committee.
What is the Federal Reserve?
The Federal Reserve monitors and sets standards for monetary policy in the United States. There are 12 Federal Reserve Banks located in major cities around the country. Although the Federal Reserve undergoes reviews by Congress, the organization is an independent entity. Therefore, they do not need the President’s approval or any other branch of government before making decisions about the economy.
There are seven members of the board. Each member is appointed by the President to the Board of Governors and serves 14 years. They can be reelected. The board is headed by a President and Vice President. Each can hold office for 4 years and can be reappointed by the Senate. Janet Yellen currently serves this role and is the successor to Ben Bernake. Alan Greenspan held the position prior to him.
The Federal Reserve monitors and generates income from several entities. They earn dividends on foreign currency, loan interest collected, services, and interest from government securities. If the Federal Reserve posts a profit above and beyond its operating costs, then those funds are redirected to the U.S. Treasury.
How do they determine interest rates?
The goal of each monthly meeting is to determine the liquidity of funds within the country and establish prices that will keep the economy stable. If the circulation of money within the country is abundant, the prices will increase. If the circulation of money within the country is minimal, the prices will decrease. The goal is to find a balance that will keep the economy stable.
The central bank lends money to retail banks at a discount interest rate. The consumer in turn borrows from the retail banks. The interest rates or Prime Interest Rates are determined by the rates assigned by the central bank to the retail bank. The central bank will raise interest rates when they want to discourage consumer borrowing and encourage more deposits. The deposits contribute to the overall worth of the bank. When the consumer deposits money, the bank can lend this money to another party to generate income from interest collected. The central bank will lower interest rates when they want to encourage consumer borrowing and increase spending.
Inflation is also another factor driving interest rates. When the Federal Reserve predicts inflation, the interest rates are typically high. If the currency is losing purchase power, the banks must compensate for what the currency will be worth when the full amount of interest is collected.
Where the market is predicted to go?
Experts predicted that 2010 would be the year the economy rebounded. However, recent research indicates that the economy has been sluggish, with the economy contracting in the first quarter of 2014. Therefore, interest rates will remain low to encourage spending.
National Average Mortgage Rates
Mortgage rates vary depending upon the down payment of the consumer, their credit score, and the type of loan that will be acquired by the consumer. For instance, in February, 2010, the national average mortgage rate for a 30 year fixed rate loan was at 4.750 percent (5.016 APR). The 15 year fixed was at 4.125 percent (4.312 APR) and the 5/1 ARM was at 3.875 percent (3.122 APR). These prices are just a snapshot of the average and will change. Therefore, it is best to research the average and know what the rates are prior to selecting a loan.
Fixed Rate Mortgages
Fixed rates are based upon the national average, but vary from state to state. They possess the same interest rate throughout the duration of the loan. Consumers desire these loans if they plan to remain in their homes for the duration of the loan. For example, the consumer obtains a mortgage when interest rates are at their lowest and then interest rates rise. The consumer does not have to worry about their rates increasing because the interest rate is “fixed”. If the interest rates decrease, the consumer may have the option of refinancing, if the costs of refinancing are less than the overall savings.
These loans are typically available in 15 year and 30 year loan options. The rates are higher than variable rate loans, as consumers pay a premium to lock in the security of a fixed rate while maintaining the ability to refinance. The longer the term, the higher the rate, because banks will lose money as purchasing power decreases due to inflation.
Adjustable Rate Mortgage (ARM)
Adjustable rates are typically lower than fixed rates when the loan is initially established. ARMs may adjust on a monthly basis in keeping with the Federal Reserve or on a bi-annual or annual basis. The consumer should be aware that as interest rates increase, so will their monthly payments. While ARMs may be appealing because the initial rates are lower, ARMs can also be a gamble. ARMs may be beneficial to investors or consumers who only plan to keep the loan for a short period of time. During that time, the consumer can enjoy low interest rates.
Hybrid Adjustable Rate Mortgage (ARM)
Hybrid Adjustable Rate Mortgages offer the consumer a low interest rate for a certain period of time. Then, they increase or adjust to the current rate after fixed rate period has elapsed. These rates can be an entire point lower than 30 year fixed rates. Therefore, there may be significant savings in terms of interest paid to the lender. Some common hybrid ARMs are 1 year fixed, 1 year adjustable rates (1/1); 5 years fixed, 1 year adjustable (5/1); and 7 years fixed, 1 year adjustable (7/1). The adjustable rates will be based upon the federal rate when the fixed term elapses. These loans are also appealing to investors or home buyers who plan to sell in a short period of time.
FHA secures loans made by private lenders. These loans are provided to Americans who have a low to middle income. This loan is available to those people who cannot afford a large down payment or higher interest rates. Interest rates for these loans are lower than the National Average for a Fixed Rate Loan. Individual banks determine the interest rates; therefore, the consumer should do research prior to accepting a loan at a particular bank. The consumer can receive a loan for as little as 3 percent down and also receive as much as 6 percent on closing costs. This means that the consumer can borrow up to 97 percent of the cost of the home.
VA loans are offered to veterans. The loans assist veterans in obtaining 100 percent financing. The United States Department of Veterans Affairs is the governing body that establishes the rules for the recipients of the VA loans. They also insure the VA loans and establish the terms of the loans offered to veterans.
Comparison of Mortgage Rates
Fixed rates are best for individuals who intend to remain in their homes for the duration of the loan. The interest rate may be higher than an ARM; however, there will be no hidden increases over the duration of the loan.
During the fixed rate period of a hybrid ARM, the consumer can enjoy the low interest rates and low payments. However, individuals who are not prepared may see an increase in their loan premiums that they cannot afford.
ARM interest rates change each month with the Federal Reserve. This loan is typically recommended for a short term investor who will sell quickly.
Fixed rate loans are by far the safest loans for consumers over a period of time.
When is the best time to obtain a mortgage?
The best time to secure a mortgage is when the rates are the lowest. Compare the National Mortgage Rate average over the past 10 -20 years. If the rate is at one of its lowest points historically, then it can be a safe entry point into the market. Many investors purchased when the market was low, but it had not reached its lowest point. Now, home buyers owe more than the house is worth. Those who wish to sell cannot fully recoup the costs of the home. Therefore, instead of having equity in the home, consumers owe more than the home is worth. Many individuals, in this instance will negotiate with the bank and “short sell” in order to relieve themselves of the debt.
As stated above, the rates change based upon the Federal Reserve and the desire to keep the economy stable. Read the reports from the office and inquire with lenders to get a fair prediction of the direction of the Federal Reserve. If the Federal Reserve decides that consumers need to spend and borrow, interest rates will remain low. However, if the Federal Reserve decides that it needs consumers to save, invest, and deposit money, the interest rates will remain high.
Hidden Mortgage Costs
Beware of Adjustable Rate Mortgages (ARMs). The interest rates will increase after the introductory period and may cause a home buyer financial stress when the rates increase. Some individuals even foreclose when this happens, because they cannot handle the increased payments.
Purchasing mortgage discount points can be a viable option if you are fairly certain you will live in the house for many years. However, if you move after a couple years then paying a significant upfront fee to lock in lower rates for the life of the loan will be money wasted.
Other hidden costs may be associated with refinancing. For instance, an individual with a fixed interest rate may decide to refinance the loan if the interest rates decrease during the duration of the loan. However, the consumer must incur costs to have the loan refinanced. The consumer should make certain that the cost of refinancing is less than the savings from a lower interest rate. Otherwise, refinancing may not be in the best interest of the consumer. Some loans also contain pre-payment penalties, which increase the cost of refinancing.