Buying a home has never been cheap, but with rampant inflation and a skyrocketing housing market, it's getting more expensive than ever. People can expect to pay $2,823 for the average 30-year fixed mortgage payment. Or a 15-year mortgage for $3,724.
With home ownership at an all-time low, home financing concepts like mortgage payments may seem foreign. Many millennials do not yet own their first property. Many are unaware of how mortgage rates, in particular, work.
Today, we will teach you how mortgage interest rates work.
What Is a Mortgage?
A mortgage is basically a big loan for buying a home. Since most people can't afford to purchase real estate with a one-time payment, they instead get a mortgage. This allows them to pay in installments, plus interest, and own the home in 15 to 30 years.
Many real estate investors use mortgages to get new properties. Even as they are paying off their mortgages, they can rent the properties out to travelers. This is one of the hidden costs many tenants don't realize their landlords are paying.
What Are Mortgage Rates?
Mortgage interest rates are a percentage of the interest you pay over the lifetime of a mortgage. For example, suppose you have a loan of $500,000 for 30 years. Add an interest rate of 6.5%, and you'd pay $3,160 (both principal and interest) each month.
If you were to bump that up to 7.5%, then the same payment would now climb to $3,496. As you can see, raising the interest rate by just a single percentage can make a payment cost hundreds of dollars more. Smaller interest rates are highly sought after.
Most mortgages work at a fixed rate, i.e., the loan maintains a static interest rate for its entire duration. Once you "lock in" the interest rate from the lender, it cannot change unless you're unable to make the payments. Wait too long, and the lender may increase the fixed rate.
Adjustable-Rate Mortgages (ARMs)
Some people may prefer the variability of an ARM. It begins at a fixed rate and then achieves a "floating" rate that depends on market factors and interest rate ceilings.
These mortgages are more flexible if you can't meet the principal and interest. However, they usually result in "balloon" mortgages that are much more expensive toward the end.
What Affects Mortgage Rates?
The primary factor that affects your mortgage rate is your credit score. People with a good credit score can secure lower mortgage rate options with more favorable conditions. Those with a lower credit score may struggle to get a mortgage in the first place, and if they do get one, interest may be high.
Other things can affect your interest rates, such as the market situation and HOA membership and association fees. You may also have private mortgage insurance or higher property taxes.
Work with PMI San Diego
Mortgage rates determine how much interest you pay on a home over a 15 or 30-year loan. Fixed, low rates are ideal and are possible if you have good credit. ARMs allow those with poor credit or financing challenges to get a more flexible mortgage.
PMI San Diego has 20 years of property management experience and uses state-of-the-art technology to keep your properties in check. Start your journey with us by getting a free rental analysis.