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Understanding Mortgage Interest Rates

As a potential homebuyer or home refinancer, you have probably heard the term mortgage interest rate. What many don’t know is that there is not one simple daily mortgage rate for all types of mortgages. Rather, daily mortgage rates are delineated by specific identifying factors associated with the loan, such as the type of loan and/or term of the loan. For example, government loans, such as FHA loans will also have their own unique daily mortgage interest rate. 

Additionally, daily interest rates for fixed rate mortgages are reported separately from mortgages having what is referred to as an ‘arm.’ A mortgage with an arm is a type of loan in which the interest remains the same for a specified period, (ie: 3 years, 5 years, 7 years or 10 years), whereupon your interest rate is modified, in accordance with interest rates existing at the conclusion of the arm term. You may have noticed that the interest rates for arm mortgages are typically much lower than those for fixed rate mortgages. This is because, the interest rate for an arm mortgage is only guaranteed for the period denoted by the length of the arm, as opposed to a fixed rate mortgage where the interest rate remains the same for the life of the loan.  The borrower is offered a discount, so to speak, for accepting a shorter term of loan so there is more risk for the borrower at that point and less risk for the lender in the fact that the borrower will typically pay the loan off more quickly than a loan where the interest is fixed for a longer period of 15 or 30 years.

Mortgage interest rates will also vary depending on the length of the loan, also referred to as loan term. Such is true for fixed rate mortgages, in that a 30-year fixed rate mortgage, is reported separately from a 15-year fixed rate mortgage. You may have already noticed the drastic variation between a mortgage interest rates for a 15-year loan term, as compared to a 30-year loan term. In general, the shorter the loan term, the lower the mortgage interest rate. The rate difference between a 15-year loan and 30-year loan can be as much as an entire percentage point.

For more information on this topic, see our post entitled ‘Monitoring Daily Mortgage Rates.’

If you have any questions, contact
Casey Moseman at (702) 271-1274

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