What's keeping you from buying the home of your dreams? If you're anything like the average American, you're likely looking at home prices across the country and wondering if they'll ever come down. Barring an event like the housing market crash of 2008, prices are only going to trend in one direction: upwards.
Thankfully, it's possible to buy a home and make other real estate investments even if you don't have all the cash. You just need to look into mortgage financing. Before you jump in, it's important to understand how mortgage rates work.
This explainer has everything you need to know.
What is a Mortgage Rate?
If you've ever taken out a loan, you're no stranger to interest rates. Home loans are no different. Lenders charge an interest rate, which you can think of as their profit for extending you the loan.
If you're loaned $100,000, your lender can charge a 5% interest per annum on the loan, to be paid through the term of the loan. If it's a five-year loan, it means you'll be making monthly payments of $6,600, with $5,000 being the monthly interest on the loan.
As you can see, the interest rate has a major impact on the cost of a mortgage. The higher the rate, the more money you'll pay.
What Affects Mortgage Rates?
In 2021, mortgage rates sunk to an all-time low of 2.65%, only to surge to around 7% in 2023. Now in 2024, we're looking at 6%.
You must be wondering why mortgage rates keep changing. Well, several factors can impact mortgage rates, and it's prudent to keep an eye on them if you want to get the best deal.
First up is the Federal Reserve. The Fed sets benchmark borrowing rates for banks. The Fed rate has a direct impact on mortgage rates.
For example, if the Fed rate is 3%, banks will borrow funds at this rate, and then add a 2-3% markup on their loans, which means consumers will get loans at a 5-6% interest rate. The Fed reviews its monetary policy eight times every year.
That being said, the Fed doesn't adjust its rates for no reason. Often, the state of the economy will force its hand. When inflation rises, for instance, the Fed will increase interest rates as a countermeasure.
Fixed-Rate vs Variable-Rate Mortgages
When you're going in for home financing, you can choose between a fixed-rate and a variable-rate mortgage. Fixed means the rate will remain the same throughout the loan term, while a variable-rate mortgage will see the rate adjusted from time to time, depending on market conditions.
Use Financing to Unlock Your Real Estate Investments
Whether you're a real estate investor who wants to buy a rental property or a regular homebuyer, you can use real estate financing to your advantage. And with a good understanding of how mortgage rates work, you'll be well-positioned to get great deals on your real estate investments.
If you need professional real estate brokerage services in Atlanta, PMI Atlanta OTP is here to help. We're part of Property Management Inc., a national real estate franchise.
Schedule a consultation to speak to a local expert.
