Everything You Need to Know About Mortgage Rates in 2020
Everything You Need to Know About Mortgage Rates in 2020
Leslie Cook
Most homebuyers rely on a mortgage to make their dreams of homeownership come true. We reviewed 24 mortgage lenders to come up with those offering not only the best mortgage rates but also the best customer experience. What follows are the highlights that make each of our recommended lenders stand out above the rest. To see our full reviews and analysis, check out Money’s Best Mortgage Lenders of 2020.
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Money’s Top Lender Picks For Mortgage Rates
Quicken Loans:
Guild Mortgage:
Navy Federal:
Our Methodology
When choosing our top mortgage lenders, we started with detailed origination information from the Mortgage Bankers Association as well as JD Power’s 2019 Primary Mortgage Origination Satisfaction Study to find lenders with the highest volume of loan originations and high customer satisfaction.
We narrowed the list down by choosing lenders who offered a wide range of loans, including conventional and non-conforming loans, FHA, VA, USDA, fixed rate and adjustable rate loans. We also chose lenders who provide streamlined applications processes and get above average ratings for customer support.
Finally, we looked at lenders who were transparent about their products and procedures, were in good standing with the Consumer Financial Protection Bureau, and had a minimum number of complaints with the Nationwide Mortgage Licensing System.
Understanding Mortgage Rates
Knowing how mortgages work and what information goes into establishing your mortgage rate can be helpful in your search for the best lender.
What Does Mortgage Rate Mean?
Your “mortgage rate” is the amount of interest a lender charges on the money borrowed to either purchase or refinance a home. For instance, if you had a $400,000 mortgage with a 3% interest rate, your annual interest expense would be $12,000 or $1,000 a month. Mortgage rates can be fixed, meaning they stay the same over the life of a loan, or adjustable, meaning they fluctuate after an initial fixed-rate period of time. Available mortgage rates fluctuate over time, they climbed as above 18% in the early-1980s and have been below 4% since the middle of 2019.
How Do Lenders Set Their Mortgage Rates?
Fixed rate mortgages are usually tied to the yields on 10-year Treasury bonds. If Treasury yields go up, mortgage rates go up and vice versa. After a fixed period, adjustable rate mortgages, on the other hand, are often tied to short term indices that track the federal funds rate, the London interbank offered rate (Libor) or the one-year Treasury note.
From there, the lender will take other market factors into consideration, including competitors’ rates, consumer demand and economic indicators such as changes in gross domestic product, the rate of inflation and the unemployment rate to set their advertised rates.
How Are Mortgage Rates for Borrowers Determined?
The rates charged to individual borrowers can vary tremendously. Lenders evaluate each loan application to assess a borrower’s ability to pay back the loan. Among the major factors a lender looks at when determining your interest rate are your credit score, down payment amount, your existing debt, and your monthly income. The better financial profile you have, the better interest rate and terms you’ll get. Where in the country you live can also impact the rate you are offered.
What Moves Mortgage Rates?
Investor Demand
Most mortgage lenders don’t keep mortgage loans on their books. Instead, loan portfolios are sold to mortgage aggregators, like Freddie Mac and Frannie Mae, which then bundle the mortgages into mortgage-backed securities.
The MBS are sold on the bond market as long-term fixed-income investments, and their prices are tied to the 10-year Treasury note. If investor demand is high for these products, interest rates tend to go lower. If investor demand drops, interest rates tend to rise.
The Federal Funds Rate
The federal funds rate is set by the Federal Reserve. When the economy is strong, the Fed tends to move interest rates higher to keep inflation in check. When the economy is weak, the Fed will lower the rate to encourage borrowing and increase liquidity. It is the interest rate banks pay for overnight, short-term loans. Since the 10-year Treasury reacts to the federal funds rate, it indirectly affects mortgage rates.
Overall Economic Growth
Mortgage rates are impacted by economic factors such as changes in gross domestic product, which measure economic output, and the unemployment rate. GDP growth usually correlates with rising incomes, declining unemployment, and more consumer spending, including on housing. Interest rates tend to rise along with increases in GDP, as lenders can charge more when there is more demand.
By contrast, when GDP is shrinking and unemployment is high, consumer lending decreases. There’s no longer a high volume of people looking for mortgages. Under these circumstances, mortgage rates tend to decrease as a way for banks to attract borrowers.
Consumer Demand
The number of people applying for mortgage purchase or refinance loans can affect the rates individual lenders charge. When a lender has a large backlog of applications, it may increase interest rates in order to slow down the flow of applications. Many lenders did this as mortgage rates sank due to the Coronavirus pandemic boosting demand for loans.
How Do Interest Rates on a Mortgage Work?
The amount you borrow to buy your home is the principal. Every month part of your payment goes to reducing the principal—which builds your equity in the home—and part to paying interest. For most people, monthly payments will also include property taxes, insurance and other fees associated with the loan.
Since the rate on your loan compounds you will pay interest on the unpaid principal until you pay it off. As a result, a larger portion of your payment goes to interest in the first few years of the loan. (In the first year of a 30-year mortgage, 83% of your payment goes toward interest and 3% toward principal.) As your loan balance goes down, you owe less interest each month, and a larger share of your money goes towards the principal. This process is called amortization.
You can calculate how much your monthly payment will be using this standard formula:
© Provided by Money.com monthly-mortgage-payment-formula
Important Factors That Affect Your Mortgage Rate
Mortgage lenders will advertise their best rates in order to attract customers, but that doesn’t mean it’s the rate you’ll be approved for. The actual interest rate you’ll end up paying will be determined by a number of factors that are specific to you.
Credit Score
Your credit score, which can range from 580 (considered “fair” by the credit bureaus) to 850 (“exceptional”), gives your lender an idea of how likely you are to pay your mortgage. The higher your credit score, the lower the interest rate you’ll qualify for, which translates to lower monthly payments and less interest paid over the life of the loan. If your credit score isn’t the best, you can look for ways to improve it or look for professional help to repair bad credit.
Debt-to-Income Ratio
Your debt-to-income ratio is calculated by dividing your total monthly debt payments (mortgage, credit cards, student loans, etc.) by your monthly gross income. Lenders prefer a DTI of 36% or less, but will typically accept ratios up to 43%.
Home Location
Mortgage rates can vary between states, as the cost of underwriting and funding a mortgage can be affected by state taxes and other fees.
Loan Amount
Your lender is going to incur costs to process, underwrite, and fund your loan. These costs are usually covered by the origination fee on your loan and range from 0.5% to 1% of the loan amount in most cases.
Jumbo loans that exceed the conforming loan limits set by Freddie Mac and Frannie Mae are likely to have higher interest rates associated with them as they represent a higher risk for the lender.
Loan Type
There are several different types of mortgage loans you can take out, including conventional, jumbo, VA, FHA, and USDA loans, all of which we’ll describe a little later. Each will have a higher or lower risk factor built into it, thereby affecting the interest rate you may be offered. (See below for more details on loan options.)
Down Payment
A 20% down payment is considered “standard” when purchasing a home. Typically, borrowers who put down less than 20% are required to pay private mortgage insurance, an insurance policy that protects your lender (not you) from default and increases your monthly payment by anywhere between .03% to 2.25% of the original loan amount. With a conventional loan PMI expires once a borrower’s equity reaches 20%, but FHA borrowers pay for the life of the loan (or until they refinance). Some lenders offer low down payment, no PMI mortgages to highly qualified borrowers.
Loan Term
Your loan term is the number of years you’ll need to pay to fully own your home. Mortgages typically come in 30 or 15 year terms, although some lenders may offer terms as low as 8 years. In general, longer term loans have higher interest rates because lenders view 15 year term loans as lower risk, since the debt will be paid off earlier. Some lenders may also let you pay the loan down faster by making higher than required monthly payments.
Interest Rate Type
The interest rate on a fixed-rate mortgage will be slightly higher than that on an adjustable rate loan. The lender is locking in a rate for 15 or 30 years so they offer a slightly higher rate to guard against the risk of losing out on a higher return in the future.
Difference Between a Fixed and Adjustable Rate Mortgage
A fixed rate mortgage means the interest rate on your loan will never change throughout its term and your monthly payments will be the same regardless of the rise and fall of interest rates on the market.
An adjustable rate mortgage usually has a period of time during which you’ll have a fixed interest rate, usually the first five or seven years of the loan. After that initial period, the interest rate will adjust every year (or other specified term) according to market trends.
How Do Mortgage Purchase Rates Differ from Refinance Rates?
If you’re doing a rate and term refinance, refinance rates should be about the same as purchase rates. However, if you’re doing a cash-out refinance, interest rates will be higher because it increases the size of your loan.
Mortgage Lender Comparison
When you think of applying for a mortgage, you’ll have a number of lender options. It’s important to shop around to find the lowest rate you can qualify for and see which type of lender best suits you. By comparing offers from several different lenders, you could find a lower interest rate and save on your monthly payments. Here’s a quick rundown of the pros and cons of each.
Credit Unions:
Credit unions are owned by members, not outside shareholders. This allows credit unions to offer better rates on their loan products and, because most of them are community-based, more flexible lending criteria, especially if someone has been a member for a long time.
Banks:
Banks are a source of investment products, loans, credit cards, and deposit accounts. Once you’ve established a relationship with a bank, it’s more than likely they’re the first lender to come to mind when looking for a mortgage, but that doesn’t mean the bank where you keep your money will offer you the best rate.
Mortgage Brokers:
A mortgage broker serves as a middleman between you and the lenders they have relationships with. They should work with you to find the best rate and may have access to exclusive deals, but some are paid by the lenders, so make sure your broker is working in your best interest.
Non-Bank Lenders:
Non-bank lenders often concentrate exclusively on providing mortgage loans and have fewer regulations with which they need to comply than traditional banks. Many are also online-only lenders, meaning they may have more digital tools.
Types of Mortgages
There are different types of mortgages for which you can apply. You should know the differences between them so you can choose the one that works best for you.
Conventional:
A conventional mortgage loan is one that is not offered or insured by the federal government. They are offered by private lenders such as banks, credit unions, and non-bank lenders, although there are some conventional loans that are secured by Freddie Mac and Fannie Mae, government sponsored entities. You can find two types of conventional loans:
Conforming Loans:
These loans meet—or “conform” to— the Freddie Mac and Fannie Mae purchase criteria including a maximum purchase price, type of property, down payment and credit requirements. For 2020, the conforming loan limit is $510,400, although some expensive real estate markets have higher limits.
Non-conforming Loans:
For properties that cost more than the maximum allowed by Fannie and Freddie , you have to take out what’s also known as a jumbo loan, which may have a different interest rate or other requirements.
Government Insured Loans:
These are loans that are issued by private lenders but are insured by the U. S. government, which means that the lender is protected from loss in case the borrower defaults. There are three common types of government insured loans:
FHA:
The Federal Housing Authority program is the most popular of the government backed loans. It has lower credit score requirements (as low as 500 in some cases) and down payments can be as low as 3.5% of the purchase price, but FHA borrowers pay mortgage insurance for the term of the loan (or until they refinance to a conventional loan).
VA:
A benefit offered to members of the military and other eligible service members, the Department of Veteran Affairs home loan program allows borrowers to purchase a home without having to pay a down payment or monthly insurance premium.
USDA:
The U.S. Department of Agriculture insures loans of up to 90% of the purchase price for borrowers in rural or low population areas who meet specific income requirements (a maximum of 115% of the local median income).
Questions to Ask Your Lender About Mortgage Rates
When it comes to mortgages, it’s important to make sure you understand every aspect of your loan. Here are some of the more important questions you should ask.
1. What interest rate are you offering and how did you arrive at my rate?
The lender should be able to explain which factors led them to arrive at the offered rate, as well as any steps you could take to improve on it.
2. How do I know this is the best mortgage rate?
A lender should be able to explain why the rate they’re offering is the best rate based on your specific information.
3. Will the rate change over the life of the loan?
You want to be clear on the type of interest rate the lender is offering. If it is a fixed rate, the interest rate should not change. If it is an adjustable rate, make sure you understand how long the fixed rate period is, when interest rates will start changing, how often they reset, whether there is a cap to how much the interest rate can increase and what that cap is.
4. If I get an adjustable rate mortgage, what’s the worst case scenario when the rates reset?
The worst that can happen is that the interest rate increases to a point where you can no longer afford the monthly payments and you risk defaulting on the loan. Ask your lender to calculate what the highest payment you may ever have to make on the loan is to see if you can still afford it.
5. How long are you locking my rate and what will the lock cost me?
Your lender may offer a rate lock, to maintain a mortgage rate for the period between when you are approved for the loan and when you close on the house. Rate locks typically last up to 60 days. Some lenders may not charge for a rate lock, while others may charge a modest fee. The longer the period of time you lock in the rate, you may be charged a higher interest rate. Rate lock periods can be extended, but often at an additional cost.
6. What is the APR and what is it for my loan?
The Annual Percentage Rate is the interest rate you will pay on the loan amount plus origination costs and any other fees. It will be higher than the advertised rate. The APR will give you a more precise understanding of your monthly payment. Consumer lenders are required to show borrowers the APR on their loans and all must use the same formula to calculate the rate.
7. What are my closing costs?
The closing costs are all the fees associated with funding your loan and can run between 3%-4% of a home’s sales price. You want to get estimates from several lenders and compare these costs—some lenders may be willing to negotiate. In most instances closing costs are paid upfront, although these costs can also be financed along with the loan principal and paid monthly.
8. What documents do I need to apply for a mortgage?
All lenders will ask for proof of income (such as pay stubs, tax returns and W-2s) and proof of funds (bank statements, investment statements), they will also ask for permission to pull your credit report. However, depending on your circumstances some lenders may require additional information. Ask what information you’ll need to supply ahead of time and gather it all to save on time.
9. What is the best type of loan for me?
A good lender will ask for all the financial and credit history information necessary before offering a loan product. They should be able to explain how each type of loan affects you, and which type of loan best fits your circumstances.
10. Is there a prepayment penalty?
Always ask the lender if there are prepayment penalties due to either a refinance, payoff, or sale of the property in question. Some states don’t allow prepayment penalties so you may want to check state regulations before applying for a mortgage. If there is a penalty, ask how much it is and if there are ways of eliminating or mitigating those costs. Also ask if payments in excess of your required monthly payment will be applied to the loan’s principal or interest.
11. How long will it take to process my application and fund the loan?
The average processing time for a loan is about 45 days although in some cases, such as FHA loans, it can take up to 60 days. Online lenders can offer faster closing times as they tend to streamline the process.
12. How much of a down payment does this type of loan require?
Some loans, such as FHA backed loans, require only a small down payment. VA loans don’t require any down payment at all. Conventional loans will vary in terms of the down payment requirements – requirements your lender will base on your credit, assets, payment history, etc.
13. Do you participate in down payment assistance programs?
There are programs designed to help home buyers who meet certain qualifications make the down payment on their homes. If you need assistance making a down payment, this can be a great option.
14. Do you guarantee on-time closings?
Not being able to close on time because your loan hasn’t been approved yet can lead to additional costs and penalties. Ask your lender if they’ll guarantee an on-time closing.
16. What are discount points?
Discount points are pre-paid interest or fees you can purchase that will reduce the interest rate on your mortgage and are paid directly to your lender when you close. Ask your lender how paying for discount points could qualify you for a lower interest rate on your mortgage.
17. What are origination fees and how much are they?
You should know exactly how much your lender is going to charge in origination fees and compare the costs with other lenders before making a choice.
These are by no means the only questions you should ask. If you have any doubts about the lending process, the fees being charged, or the interest rate you’ll pay, make sure to ask the lender to clarify.
What Are the Mortgage Rate Trends and Predictions for 2020?
So far, 2020 has seen mortgage rates set seven record-lows in a six-month period. What happens over the next six months will depend in large part on whether there is a sustained economic recovery and/or progress in the treatment/prevention of COVID-19.
Will Mortgage Rates Continue to Go Down?
There are a number of factors currently exerting downward pressure on long term interest rates, so lower interest rates are a possibility. Most experts expect rates to stay around this level or to drop further. The main question is: how much lower can they really go?
What Happened With Mortgage Rates in May, June, and July?
Interest rates have been steadily declining since the beginning of the year for fixed rate mortgages, according to weekly data from Freddie Mac. In May, the interest rate for a 30 year fixed-rate loan decreased from 3.26% during the first week of the month to a new, although temporary, low of 3.15% on the 28th. During the same week last year, the average rate for a 30-year loan was 3.73%.
Although interest rates moved up slightly at the beginning of June, a new all-time low of 3.13% was set on June 18, setting the stage for a string of new lows in July.
Three consecutive record-lows have been set so far, the first on July 2, when the interest rate on a 30 year fixed rate mortgage dropped to 3.10%, and the next on July 9, when rates dropped to 3.03%. Mortgage rates broke the 3% barrier for the first time in history on July 16, settling in at 2.98%, before inching back up to its current rate of 3.01%.
The interest rates on 15-year fixed rate mortgages have also seen a steady decline. Interest rates on 15-year loans have been below 3.00% almost non-stop since February. For the week ending June 18, the interest rate was 2.58%, just two percentage points above the all-time low of 2.56% set in May 2013. On July 16, the rate dropped to 2.48%, a new low.
What Are the Mortgage Rate Predictions for August?
Increased concerns over the recent resurgence of the COVID-19 virus have led to renewed stay-at-home orders and paused re-openings in many states which, combined with high unemployment and a tight housing supply, is exerting downward pressure on interest rates.
Mortgage rates are likely to remain low for the month of August. Whether interest rates go back below 3% or hover just above will depend on the release of upcoming economic data related to GDP and unemployment, among other indicators, and on how the country manages the recent COVID-19 outbreaks.
There have been some positive economic recovery signs over the last three months,, including significant gains in the job market as the unemployment rate dropped to 11.1% at the end of June. If more positive signs of a sustained, if modest, economic recovery continue to be seen, mortgage rates may drift up slightly.
What Are Mortgage Rates Expected to Do in the Next 90 Days?
The outlook isn’t significantly different for the next 90 days. A lot will depend on the extent of the economic recovery and any setbacks in controlling the coronavirus outbreak. Expect mortgage rates to stay low, with a potential to set a new record low, but also with the potential to increase slightly if the economy continues to rebound and the virus is under control.
COVID-19 and Its Effect on Mortgage Rates
On March 11, the World Health Organization declared the coronavirus a pandemic. By the end of the month, many states had started implementing lockdown measures to try to control the spread of the disease. By April, the whole country was at least partially shut down.
As the economy ground to a halt, the Federal Reserve took steps to prop up the markets, control volatility, and ensure the availability of credit.
The Fed first cut short term interest rates down a half a percentage point to a target range of 1.00 – 1.25% on March 3. Two weeks later, the Fed lowered the target range again, to 0.0-.25%, where it remains currently.
In addition to cutting rates, the Fed also started buying mortgage backed securities and Treasury bonds in an effort to attract investors and preserve the ability of lenders to provide credit to consumers during the economic downturn.
The net result of lowering short term interest rates, coupled with the liquidity provided by the Fed’s decision to buy MBS and Treasuries, low inflation, declining GDP , and high unemployment rates, is that long term interest rates, like those on a 30 year mortgage, have been driven down to historic lows.
What Will the Fed Do Next?
At its June 10 meeting, the Fed announced its intention to stay the course and keep short term interest rates at the current target rate of 0.0 – 0.25%. Projections show most of the Fed’s policy makers expect to keep rates near zero at least until 2022. It also pledged to buy about $40 billion in MBS and $80 billion in Treasuries per month in order to keep the economy stable, increase liquidity, and encourage investments – a strategy known as Quantitative Easing.
While the Fed has not outlined future actions, one potential option mentioned by New York Federal Reserve president John Williams in an interview with Bloomberg Television is what is known as yield curve control (YCC). With YCC, the Fed would set a target interest rate for long term bonds. It would then purchase any bonds that exceeded that yield.
This would allow the Fed to reduce the amount of government borrowing needed to spur economic growth, while at the same time reducing the yield gap between bonds and target interest rates. In effect, long term interest rates could go much lower than they are now.
What Experts Say About Interest Rates in 2020
Given the depth of the economic slump and the long road to recovery that lays ahead, don’t expect to see any significant change in mortgage rates until possibly late in the year, when interest rates may increase slightly.
We spoke to several experts about what will happen with mortgage rates in the last half of 2020, and while all of them agreed that interest rates will be staying on the low end, they do see situations that might trigger a rate increase. Here’s what they had to say:
Mortgage rates will stay low:
“We think that (lower rates) are definitely a possibility, we just think that it’s more likely that mortgage rates stay where they are,” says Mike Fratantoni, senior vice president and chief economist of the Mortgage Bankers Association (MBA).
Fratantoni sees rates staying close to where they are today because a full economic recovery from the pandemic is likely to take several years, and factors that push rates down, like high unemployment, low inflation and low GDP, are likely to continue to exert downward pressure on interest rates.
Economic improvement will bring higher rates:
“I think mortgage rates probably go a little bit higher if all goes well and the economy continues to improve. But we don’t really expect a sharp spike higher in mortgage rates,” according to Scott Brown, chief economist for Raymond James Financial.
Brown expects interest rates to react more to the overall strength of the economy, with improvement in unemployment rates and consumer spending leading to slightly higher interest rates. However, he notes the economy is still far away from where it was prior to the pandemic, meaning interest rates should stay low for quite some time.
The elections will affect interest rates:
“I don’t foresee them (interest rates) going anywhere until election time. No matter who gets elected, you see an adjustment in interest rates, almost always,” says Ralph DiBugnara, president of Home Qualified, an online real estate educational resource.
According to DiBugnara, interest rates almost always tick up around election time as there is uncertainty over what policy changes one candidate winning over another might bring. Even then, these changes will probably be slight, keeping mortgage rates low for the remainder of the year.
Take advantage of the low interest rate environment:
“We’ve been more or less range-bound and obviously the 30-year mortgage rate is the lowest it’s ever been and you may see a little bit of an increase if the economy begins to recover but I wouldn’t expect a lot. If you still have a job and you have a down payment, it’s still a very good time to buy a house,” says Brown.
Frequently Asked Questions
Is the government doing anything to influence rates?
Yes. The Federal Reserve is keeping short term interest rates near zero and buying mortgage backed securities and Treasury bonds, which help keep mortgage rates low. It is expected that this policy will be kept in place until 2022, meaning home purchases and refinancing should be very accessible to consumers for at least the next two years.
I hear U.S. Treasury bonds are at record low yields, shouldn’t my mortgage rate be lower?
Mortgage rates are not solely determined by bond yields. They are determined by a number of factors, such as market trends, inflation, GDP, unemployment and consumer demand. However, mortgage rates do tend to move directly in relationship with increases or decreases in bond yields.
As of March 15, 2020, the news was reporting that the Federal Reserve’s Federal Funds rate was low and near zero. Doesn’t this mean the rate on my mortgage loan should be near zero too?
No. The Federal Fund rate refers to the interest rate that banks charge each other for overnight, or short term, loans. Lenders will add +-3.00% to the Federal Fund rate to establish a Prime Rate, which is the interest rate offered to the lender’s most credit-worthy borrowers (usually corporate clients), and which in turn serves as a starting point for the interest rate charged to consumers.
What if I find a lower rate with another lender?
If you have been preapproved for a mortgage loan but have not signed the loan documents, you can switch to another lender. If you are refinancing your home, you have three days after signing the loan documents to change your mind (this is called the rescission period) and switch to another lender. However, switching lenders at this point means starting the application process over again and will delay your closing.
What’s the difference between a mortgage rate lock, a float, and a rate lock float down?
A mortgage rate lock is when an agreement is reached between a borrower and a lender to lock in an interest rate for a specific period of time, usually between 30 to 60 days. During this time, the interest rate cannot change unless there is a change in the mortgage application. A float means that the interest rate on your mortgage will change daily along with market conditions until the date of your closing. A rate lock float down option on your mortgage means that the lender will lock in your interest rate but allow it to be adjusted downward (never upward) if interest rates fall before the closing.
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