| Term | Rate | APR |
|---|---|---|
| 10/6 ARM* | 7.000% | 7.534% |
| 7/6ARM | 6.750% | 7.561% |
| 5/6 ARM | 6.625% | 7.227% |
Fixed vs. Adjustable Mortgages
Mortgages come in two basic types: fixed rate and adjustable. Each has its pros and cons, depending on your situation.
Fixed-rate mortgages are what they sound like. Their interest rate is fixed for the life of the loan, which might, for example, be 15 or 30 years. The advantage of a fixed-rate loan is its predictability: you won't be hit with a higher rate if interest rates rise. Fixed-rate mortgages are often a good choice for people who are buying a home that they intend to live in for many years to come. The disadvantage of fixed-rate mortgages, on the other hand, is that they typically charge a higher interest rate, at least at the beginning, than their adjustable-rate counterparts.
Adjustable-rate mortgages (ARMs) generally have a very attractive introductory rate. But after a specified time, the rate can change according to the terms of the loan. In the examples above, the rate will stay fixed for 10, seven, or five years, after which it will adjust every six months. (ARMs are available with many other lengths and adjustment intervals.)
Each ARM is tied to a particular benchmark index, such as the Secured Overnight Financing Rate (SOFR). For example, if the index rises to 7% and the lender adds a margin of 3%, your interest rate could rise to 10%. Conversely, if the index fell, your interest rate would, as well.
The danger with an ARM is that if interest rates shoot up substantially by the time the mortgage begins to adjust, the homeowner could be subjected to a large and possibly unaffordable increase in their monthly paymentβalthough annual and lifetime caps on rate increases provide some protection on loans that have them. For that reason, ARMs can be best suited to people who expect to move within a certain number of years, before the initial rate elapses.
Note that choosing between a fixed and adjustable-rate mortgage isn't a lifetime decision. You can refinance either type into the other type, or into the same type, if interest rates fall and you can better a better deal.
Other Factors That Can Affect Your Mortgage Rate
In addition to whether you choose a fixed or adjustable loan, a number of other factors can affect your mortgage rate. Among them:
The lender and loan program. Mortgage rates will vary from lender to lender even on the very same type of loan, so it pays to shop around. In addition, different loan programs can have different rates and any one lender may participate in several programs, giving you multiple options.
Conforming loans are the most widely available option. They are issued by banks and other lenders but usually purchased by Freddie Mac or Fannie Mae, two government-sponsored companies that buy loans and bundle them into mortgage-backed securities for sale to investors. Conforming loans tend to have lower interest rates than nonconforming loans, such as jumbo loans.
Banks and other lenders can also offer government-guaranteed loans, such as FHA loans insured by the Federal Housing Administration, USDA loans insured by the U.S. Department of Agriculture (USDA), and VA loans insured by the Department of Veterans Affairs. If you qualify for one of these programs you may get a better rate than you'd be eligible for on a regular mortgage, as well as a lower required down payment.
Your credit. Lenders often offer better rates to borrowers with solid credit histories and high credit scores. For that reason, it makes sense to check your credit score and credit reports before you apply so you know where you stand. If possible, do what you can to improve your credit score in the meantime, such as keeping your credit utilization ratio low and correcting any damaging errors you find in your credit reports.
How much you put down. The higher your down payment, the better an interest rate lenders may offer you. That's because they'll face less risk. Making as large a down payment as you can afford has some other advantages, as well. For one thing, you'll be borrowing less money, reducing how much you'll owe in interest over the life of the loan. For another, down payments of less than 20% often mean that you'll have to pay for private mortgage insurance (PMI) each month until your equity in the home reaches 20%.
Whether you pay points. Many lenders will charge you a lower interest rate if you pay them points, sometimes called discount points, upfront. Each point equals 1% of the mortgage amountβ$1,000 on a $100,000 mortgage, for example. If you have the cash available, points can be a way to reduce your monthly loan payments as well as how much interest you'll pay in total over the life of the loan.
How Can You See Your Credit Report?
You can obtain a free copy of your credit report from each of the three major credit bureausβEquifax, Experian, and TransUnionβat least once a year at the official website AnnualCreditReport.com. The website also explains the process for disputing any errors you find in your reports
How Can You Find Out Your Credit Score?
You can obtain your credit score free of charge from many banks and credit card companies as well as from online sources. Note that there a variety of credit scoring models, so you probably have multiple credit scores and the one you obtain might not match all the others. However, it should give you a pretty good idea of whether your score is mortgage application-ready or could use some improvement before you apply.
Is Mortgage Interest Tax-Deductible?
Mortgage interest on your principal residence is deductible up to certain limits. However, you must itemize your tax deductions in order to claim it. Since the standard deduction was raised in 2017, many taxpayers no longer benefit from itemizing. For the 2023 tax year, the standard deduction for married couples filing jointly is $27,700. Forsingle taxpayers and married individuals filing separately, it's $13,850, and for heads of households, it's $20,800.
The Bottom Line
Interest rates on mortgages can vary widely, depending on the lender, the type of loan, and other factors. Once you've decided on the type of loan that's right for you, shop around for the best interest rates and other terms. And if your situation changes in the future, remember that you may be able to refinance into a different loan that's a better fit.
