While there might be no easy answer as to what is the best mortgage interest rate for a first-time homebuyer, it is possible to find loans that are better suited to a first-time homeowner. The best mortgage lender for you will be one that gives you the lowest rates and terms that you need.
Someone with a big down payment and good credit will generally get the lowest rates with a traditional loan. Borrowers on conventional loans can avoid private mortgage insurance by making a 20% down payment or reaching 20% equity in their home. While it is definitely possible to qualify for a mortgage without making 20% down, lenders may consider very low down payments as risky, which may result in them giving you a higher interest rate and mortgage payment because of the private mortgage insurance (PMI).
Lenders consider mortgages for investment properties, second homes, and manufactured homes as risky, so rates for mortgages on investment properties can also be higher. The lower expectations of significant down payments and a higher credit score mean that mortgage rates for FHA loans can be higher. Government-backed loans may have lower mortgage rates, particularly if your credit score is lower, but those same loans may come with potentially higher fees that increase your APR.
Credit scores, the length of a loan, interest rate type (fixed vs. adjustable), down payment size, the home location, and loan size all will impact what mortgage rates are offered to individual homebuyers. You will want to calculate the cost of mortgage financing for various loan types to understand how they impact mortgage rates when preparing to apply to lenders. Not every lender offers every type of loan, and rates may differ greatly depending on which type of loan you select.
There are several different types of mortgages out there, and these typically vary based on how long your loan is for, how long it is for years, and if your interest rates are fixed or adjustable. There are hundreds of mortgage lenders to choose from, each with potentially a dozen or more products, from fixed rates to variable rates, from 10-year terms to 30-year terms. The most common mortgage requires borrowers to repay over a 30-year period, but 20-year mortgages and 15-year mortgages are available as well.
That is because a lot of mortgages are refinanced or paid down after 10 years, even though 30-year loans are the norm. Even if you are staying in the same house the rest of your life, you may want to refinance to get better terms or rates. You should consider refinancing a home loan if the interest rate on your current mortgage is higher than the interest rate on your mortgage today by more than one percentage point.
Since your mortgage rate is a percentage of your monthly loan payments, it follows that higher payments will lead to higher mortgage rates. With a fixed-rate loan, your interest rate does not vary, but the calculation is different with a variable-rate mortgage, since rates may change during your loan term. When the 10-year Treasury interest rate increases, the interest rate on a new fixed-rate mortgage will increase as well (but not on an existing mortgage, which cannot change interest rates). Variable rates eventually outpace those for conventional fixed rates, so you end up paying more each month than if you had a fixed mortgage.
For instance, if you are on a fixed-rate mortgage at 4.5% and prevailing rates jump up to 6% over the next week, year, or decades, your interest rates are locked, so you never have to worry about paying more. For example, a 5/1 ARM (Adjustable Rate Mortgage) will have a fixed rate for the first five years of your loan, and then it changes each year thereafter.
Adjustable-rate mortgages typically have lower rates locked in for the first several years. Loan length: The length of the loan also makes a difference. While your total monthly payments may still fluctuate depending on real estate taxes or other factors that change during your mortgage, a fixed rate locks in what you will pay in interest for the duration of your loan. These rate averages will give you a good sense of how the length of your mortgage payment terms and what kind of loan you are getting will affect your interest rates. A mortgage rates a one of the critical factors that borrowers consider when looking at their home financing options, as it will impact their monthly payments as well as the amount that they will be paying over the life of their loan.
If you receive a $250 mortgage, but with a 3.8% interest rate, over a 30-year mortgage payment period, you would pay a total of $169,362. If the house is worth $250,000, and you are going to take out a $210,000 mortgage to buy it, you are going to have an 84% loan-to-value ratio because you are borrowing 84% of the homes value. For example, if you take out a $250,000 mortgage at a fixed interest rate of 2.8% for 30 years, you may be paying about $1,027 a month, with $119,805 in interest over $250s lifetime. For example, a borrower with a good credit score and 20 percent down payment taking a $200,000 mortgage with a 30 year fixed-rate mortgage at 4.25% rather than 4.75% would save nearly $60 a month in savings – in the first five years, it is savings of $3,500.
Your local bank or credit union likely writes mortgages at rates closer to the national median today. It is best to always check and monitor your credit prior to applying for mortgage loans to understand your position, as it may be hard to qualify for lower rates with poor credit. That is why it is important to shop around and get preapproved, so that you can compare current mortgage rates from different lenders and see what you are eligible for.
While lower median mortgage rates and refinancing rates are promising signs for more affordable loans, keep in mind they are never a guarantee of what a lender will offer you. Some loan products, such as the USDA Loan, provide typically lower rates than traditional mortgage options to qualified borrowers. Lenders typically require mortgage insurance for loans that have a down payment of less than 20% (in the case of buying a house) or a home equity of less than 20% (in the case of a refinance).