How Do Mortgage Rates Work – How They Affect You

When we think of the classic American Dream, it usually includes owning a home with a white picket fence, a garage, and a BBQ out back. A place to call your own — filled with family, fun times, heartfelt memories, and perhaps a lawn gnome.  

To make that a reality, you probably need to get a mortgage. So in this article, we will talk about mortgages, how mortgage rates work, and how they affect you when you are looking to purchase real estate. 

What is a Mortgage? 

A mortgage is a type of loan used to purchase property. When you get a mortgage, you agree to pay the lender over time, typically in a series of regular payments that are divided into the principal and interest. The principal is the amount of money that you borrowed, where the interest that you pay on a mortgage is the actual mortgage rate and is represented as a percentage. 

People use mortgages to buy a property without having the full amount of money needed to buy the property outright. In general, people with high credit scores (above 710) and a higher down payment tend to pay less on their mortgage rates than other people.

Most mortgages are offered in 30-year or 15-year packages, but they can also go to 40-year and 5-year. The lower-year rates let people pay off their mortgages faster and also spend less on interest. 

Mortgage rates are offered as either fixed or variable. A fixed rate keeps you locked in the rate you originally signed up for, whereas a variable or adjustable-rate mortgage (ARM) has an interest rate that fluctuates over the loan’s life based on what interest rates are doing in the market. 

What Are the Current Mortgage Rates? 

As of August 22, 2022, the average rate on a 30-year fixed mortgage is 5.81%, compared to 5.55% a week ago. The average rate on a 15-year fixed mortgage is 4.98%. To help battle inflation and try to prevent a recession, the FED has increased mortgage rates to the highest they have been since 2009. 

How Much Would You Pay in Interest for a 30-Year? 

On a $100,000 30-year loan, you would pay $111,460 in interest. That is more than double the principal amount. 

How Much Would You Pay In Interest for a 15-Year? 

On a $100,000 15-year loan, you would pay $42,155 in interest. 

If you want to calculate how much you would pay in interest on a full mortgage, you can use this mortgage calculator here. 

Why Are Mortgage Rates So High? 

The logic is that with higher interest rates, the demand for goods, services, and property will go down, and people will borrow less money. This can help combat inflation which is at its highest since the 80s, but it also makes it so it’s not the best time to buy a house. 

To add fuel to the fire, the huge demand for housing during the pandemic has made it so the average price of American houses has gone up 17% since the same time last year in 2021. This is the strongest annual rise in the last two decades. 

The combination of high mortgage rates and housing prices has made this a time to save and wait for prices and rates to go back down. 

What to Do Now? 

Unless you absolutely have to buy a house, this is not the time to get a mortgage. The smartest thing to do is try and budget, save, and improve your credit score so you can have as high of a down payment as possible when interest rates go back down. Then, you can lock in a low fixed rate and hopefully own your property outright even sooner. 

Another option would be to get a mortgage but use the property itself to cover your debt. Meaning, you can rent part of your property to cover the mortgage and pay off the place. This type of capital gain is an asset and is taxed a lot less than any profit made from a normal job.  

Hopefully, this article helps, and you are able to get the dream home you deserve.