What’s a good APR for a home loan? The answer is relative. Annual percentage rates (APRs) fluctuate based on the prime rate and other economic factors, so the definition of a good APR will vary based on what’s available when you ask the question. In addition, the rates offered to an individual depend on their credit history, so a ‘good’ rate for someone with a 650 FICO score might look very different from a good rate for someone with a 775 FICO score.
Even a slight difference in APR can mean a difference of tens of thousands of dollars in the amount you pay for your home throughout the mortgage term. So it’s worth putting in the legwork to make sound financial decisions.
In this article, we’ll go over the basics of interest rates and how to ensure you’re getting the best mortgage APR available when you’re ready to buy.
In This Article
Interest is the fee you pay a bank or lender for the right to borrow money from them.
Financial institutions express interest rates for mortgages and other common consumer loans as an Annual Percentage Rate, or APR. The APR appears as a percentage of the principal, or outstanding loan amount; this percentage is the amount you’ll pay each year on your loan. All lenders must disclose the APR of a loan they offer; this allows consumers to compare loans to each other.
The APR gives you an idea of how much you’ll pay each year for a loan, but it doesn’t account for compounding interest. It’s important to note that even though the interest is an APR, mortgage interest is calculated each month based on the outstanding principal. Therefore, lenders allocate standard mortgage payments to the interest charges first each month, then to the principal.
Since they calculate interest each month on the outstanding principal, you pay down your principal very slowly at first, as most of your payment goes to the monthly interest. As you start to reduce your principal, this lowers the interest charges each month and more of the payment will go to the principal. This creates a snowball effect: the rate at which you pay down your principal continues to increase until you finish paying off your mortgage.
Most loan interest rates are set in relation to the prime rate, which is the best rate a bank will offer its customers. Most banks set their prime rate in relation to the federal funds rate, which the Federal Reserve establishes as the rate banks use to make short-term loans to each other. The Wall Street Journal publishes a prime rate that averages the prime rate of the 30 largest banks in America, which many other banks use as their benchmark for setting their own prime rates.
The prime rate is only available to borrowers with great credit history, and specific loan qualifications. However, most lenders use this rate as their benchmark. Several other factors will influence the interest rate on a loan:
- The credit score and credit history of the borrower: The creditworthiness of the customer can influence the interest rate offered by the lender.
- Type of loan: Different interest rates may apply for special programs such as VA loans, FHA loans, or USDA loans compared to conventional mortgage loans.
- Market conditions: Home values and market conditions in a given [AP4] area can influence an interest rate.
- Fixed-rate versus adjustable-rate: Fixed-rate loans have an interest rate locked in for the life of the loan. Adjustable-rate mortgages rise or fall at certain intervals based on a benchmark rate, usually the prime rate. These rates are typically lower than a fixed rate offered at the same time; however, if interest rates rise significantly, this may cause a substantial increase in the mortgage payment.
- Down payment: A down payment on your mortgage lowers the loan amount, and most lenders believe it lowers the risk of the loan. As such, a down payment [AP5] can reduce your interest rate in addition to lowering your monthly payment. As an added bonus, a down payment of 20% means you don’t have to pay for private mortgage insurance (PMI.)
One way to lower your mortgage interest rate is ‘buying points’ or ‘buying down the rate.’ The borrower pays a set fee upfront to lower the interest rate over the life of the loan. Each point the borrower buys costs 1 percent of the mortgage amount and reduces the interest rate by a set amount, usually 0.25%, although this can vary depending on the lender.
Is it worth it to pay upfront for an interest rate reduction? The answer is ‘sometimes.’ It depends on the type and length of the loan, how long you plan to live in the home, whether you plan to pay the mortgage early, and overall market conditions.
Interest rates are in a state of flux right now, and it’s difficult to predict how they will fluctuate in the coming months.
Whether a mortgage APR is good depends not only on your credit but on the overall market conditions. Thirty years ago, 9-10% was a reasonable interest rate. For the last few years, 3-4% was suitable for 30-year fixed-rate mortgages. Recently, rates have risen into the 5-6% range.
During the COVID-19 public health crisis, the Federal Reserve reduced the federal funds rate to near zero to stimulate the economy in an attempt to avoid a recession, which led mortgage rates to near-record lows. However, home prices have skyrocketed in most areas during the economic recovery, and other consumer costs such as food and fuel have also increased in cost significantly. As such, the federal reserve has made rate adjustments recently. The Federal Reserve adjusts rates as needed to manage economic factors like inflation and growth, and most analysts believe they will continue to make adjustments in the coming months.
When asking the question “what is a good APR for a home loan?” the answer now is probably different than the answer a year from now. But, then again, it may be the same; Federal Reserve interest rate adjustments are infamously hard to predict.
When you’re ready to buy a house, you may not want to wait for interest rates to decrease when there’s no way to know when or even if they will drop. However, it’s crucial to get the best rate you can since it can make a difference of tens of thousands of dollars over the course of the loan. So how can you ensure you’re getting the best APR you can?
Before you go home shopping, work on improving your credit score . Pay down credit accounts where possible, avoid opening new credit accounts or loans, and make sure you’re making payments on time. Improving your credit score by even a moderate amount can pay huge dividends!
Many Americans are eligible for special government-backed mortgage programs like VA, FHA, or USDA loans. These loans have special requirements but often carry special APRs and other benefits.
Take the time to compare different types of mortgages. For example, adjustable rate mortgages tend to have lower APRs than fixed-rate mortgages, but an interest rate increase can make your monthly payment skyrocket.
Considering various mortgage lengths and types is a good idea, but you should also shop around at different lenders. While all lenders will be working from your credit report in making a decision, different lenders may prioritize certain data differently or use different proprietary scoring algorithms. Since lenders are required to provide a standardized Loan Estimate, you can easily compare offers and find the one that’s most advantageous for you.
What is a good APR for a home loan? The best APR you can get. There are so many advantages to owning your home that it’s a smart choice for most consumers, even with rising interest rates. Therefore, it’s essential to do your homework and get the best rate possible. However, many factors influencing interest rates are beyond your control, and it’s impossible to predict whether those factors will make rates rise or drop in the future.
Homeownership is a huge factor in financial empowerment. Make thoughtful decisions and do your research, and you can make your homeowner dreams come true.
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.
Eligibility for a HELOC up to $500,000 depends on the information provided in the HELOC application. Borrower must take an initial draw of $50,000 at closing. Subsequent draws are prohibited during the first 90 days following closing. After the first 90 days following closing, subsequent draws must be $1,000 or more (not applicable in Texas). Loans above $250,000 require an in-home appraisal. Loans above $250,000 require title insurance.
The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Spring EQ borrowers get their cash on average in 18 days. The time period calculation to get cash is based on the last 6 months of 2021 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated 3-day right of rescission grace period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications.
Spring EQ cannot use a borrower’s home equity funds to pay (in part or in full) Spring EQ non-homestead debt at account opening. Minimum draw in Texas is $4,000. To access HELOC funds, borrower must request convenience checks.
Interest rates may be adjusted based on factors related to the applicant’s credit profile, income and debt ratios, the presence of existing liens against and the location of the subject property, the occupancy status of the subject property, as well as the initial draw amount taken at the time of closing. Speak to a Prosper Agent for details.
Qualified applicants may borrow up to 90% of their home’s value (not applicable in Texas). This does not apply to investment properties. For Texas HELOCs, qualified applicants may borrow up to 80% of their home’s value.
HELOCs through Prosper may not be available in all states. Please carefully review your HELOC credit agreement for more information.
All HELOCs are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.
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