Quick Introduction to 30 Year Fixed Mortgages
Most homebuyers look at 30-year fixed mortgage rates when shopping around for mortgages. That’s because the 30-year fixed-rate mortgage is the most popular type of home loan in the country.
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30-Year Fixed Mortgage Rates
Anyone who qualifies for a 30-year fixed-rate mortgage makes fixed payments over the course of 360 months. That means that the amount of interest that a homebuyer is expected to pay doesn’t change over the life of the loan. Knowing exactly how high your mortgage bill will be each month can make it easier to budget and set aside money to cover your housing-related expenses.
Historical 30-Year Fixed Mortgage Rates
In the early 1980s, countries around the world were in the midst of a recession. At that point, there were double-digit mortgage rates for 30-year fixed-rate home loans. In fact, annual mortgage rates were as high as 18.45%, on average, in October 1981. That’s according to data from Freddie Mac. Mortgage rates have fallen substantially since then. They haven’t been higher than 10% since 1990.
At the start of the housing crisis in 2008, average annual rates on 30-year fixed mortgages hovered around 6%. In June 2016, the rate on 30-year fixed mortgages reached near-record lows at an average of 3.57%. The lowest average annual rate since 1970 was 3.35% in late 2012.
30-Year Fixed Mortgage Rates
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When 30-year fixed mortgage rates are low, homeownership is cheaper and therefore generally more accessible, particularly for first-time buyers. Many existing homeowners also decide to refinance in order to lock in lower interest rates. At the same time, low mortgage rates can indicate that an economy is slow.
How 30-Year Fixed Mortgage Rates Stack Up Against Other Mortgage Rates
People who take on 30-year fixed-rate mortgages are generally considered to be riskier than those who take on 15-year fixed-rate mortgages. Since the length of the loan term is longer, borrowers are more likely to default on their loans. As a result, 30-year fixed mortgage rates tend to be higher than 15-year fixed mortgage rates.
Fixed mortgage rates are typically higher than adjustable rate mortgage rates. If you opt for an adjustable rate mortgage, your mortgage rate will be low in the beginning of your loan term but will then increase as time passes. So while a fixed rate means a higher rate, it doesn’t change over the life of the loan.
30-Year Fixed Mortgage Rate Quotes
A mortgage rate quote will give you an estimate of the kind of interest rate you’ll qualify for based on your home’s purchase price, your credit score, how much money you’re putting down and where the home you’re buying is located. A rate quote will also give you an APR and an estimate of the fees you’ll pay for getting a lender to process your loan application.
Unlike your interest rate, your APR will reflect the true cost of taking on a 30-year fixed mortgage rate. It factors in the fees you’ll be required to pay. As you’re comparing mortgage rates, it’s important to pay attention to the APRs.
How to Get a Low 30-Year Fixed Mortgage Rate
Getting the lowest possible mortgage rate for your 30-year fixed home loan is important if you want to keep your housing costs low. After all, as a homeowner you’ll be responsible for paying for property taxes, homeowners insurance, maintenance and repairs in addition to making a mortgage payment and paying interest.
To qualify for the lowest (and best) 30-year fixed mortgage rates, you’ll need to have good credit. Most mortgage lenders look at FICO credit scores when assessing potential borrowers. Based on the FICO scoring model, a good credit score falls in the 670 – 739 range.
Different mortgage lenders have different standards regarding the credit scores that they expect borrowers to have. But in most cases, you won’t be able to qualify for a conventional mortgage loan if your FICO credit score falls below 620. If your FICO score falls below that threshold, you do still have options. You can look into getting an FHA loan or a USDA loan (if you’re planning on buying a home in a rural area).
Besides having a high credit score, you’ll need to have a low debt-to-income (DTI) ratio if you want to qualify for a low mortgage rate. Your DTI is the amount of debt you’re paying off each month relative to your monthly gross income. Generally, you won’t be eligible for a qualified mortgage if your debt-to-income ratio is higher than 43%.
Shopping around for mortgage rates is a good idea if you want a low rate on your 30-year fixed home loan. You might even be able to negotiate and reduce the mortgage rate that a particular lender is offering. Certain states have special home loan programs that give homeowners a shot at qualifying for 30-year fixed mortgages with low rates. It’s a good idea to do some research on what your state has to offer.
All of this means it’s important to start preparing before you are actually looking to buy a home. You can take time to improve your credit score and lower your debt-to-income ratio well ahead of the time you apply for a mortgage. This can help you to qualify for the lowest possible 30-year fixed mortgage rate.
Other Factors That Impact 30-Year Fixed Mortgage Rates
Your credit score and your debt-to-income rate are just two factors that affect your mortgage rate. Having plenty of cash saved up and a stable job can help as well. The size of your down payment has an impact on your mortgage rate as well.
By making a large down payment (the standard is 20%), you won’t need to borrow as much money from your lender. As a result, your loan-to-value ratio (the ratio of the mortgage loan amount to the value of the home you’re buying) and your overall risk will be lower. Mortgage lenders tend to offer lower mortgage rates to borrowers with low LTV ratios.
You can also lower your mortgage rate by paying for mortgage (or discount) points. A single point is equal to 1% of your mortgage loan amount and can lower your mortgage rate by up to a quarter of a percentage.
Taxes and 30-Year Fixed-Rate Mortgages
When tax season arrives, you can score a tax deduction for the mortgage interest you pay all year. As long as you itemize your deductions (as opposed to claiming the standard deduction), you can deduct the mortgage interest you paid if your home loan amount is equal to $1 million or less. You can also deduct interest on up to $100,000 of debt from a second mortgage (specifically a home equity loan).
In some states, homeowners are allowed to deduct mortgage interest on both their state and federal income tax returns. If someone forgot to deduct their mortgage interest on their federal income tax return, they might be able to deduct it on their state return.
Refinancing Your 30-Year Fixed-Rate Mortgage
You can always try to refinance your 30-year fixed-rate mortgage if you’re not happy with your current mortgage rate. Just keep in mind that you’ll have to go through an application process and a credit check. If you don’t have a good credit score or you can’t meet your lender’s other requirements, you probably won’t be able to qualify for a lower mortgage rate.
If you refinance your 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage, you’ll shorten your mortgage loan term and likely reduce your mortgage interest rate. While your monthly mortgage payment will be higher, you’ll save money in the long run by paying off your mortgage in 15 years instead of 30 years so you’ll pay less interest.