Mortgage Rates 101

MORTGAGE RATES 101
Welcome to the Zing Education Guide on Mortgage Rates
from Quicken Loans.
Here, you’ll learn everything you need to know about mortgage rates and
what to do at every step of the home loan process. If you’re looking for
information on amortization tables and want to learn what determines
current rates, you’ve come to the right place.
MORTGAGE RATES 101:
TABLE OF CONTENTS
Understanding Mortgage Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
How Are Mortgage Rates Calculated?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4–5
Adjustable Mortgage Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
What Determines Mortgage Rates?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
What Determines My Mortgage Rates? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7–8
Are Rates Going Up or Down?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgage Rate Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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MORTGAGE RATES 101:
UNDERSTANDING MORTGAGE RATES
Most people in the United States, at some point in their lives, make a decision to purchase a home with a mortgage. Each mortgage
has what is referred to as a “rate.” This is simply the percentage of interest you’re paying for the ability to borrow the money to
buy your home. Every mortgage has one, but few folks truly understand mortgage rates or how they’re determined.
What determines mortgage rates? How do we know if a mortgage rate is going to go up or down? When is the best time to lock
in a mortgage rate? Also, how can paying points save you money? This guide is aimed at helping you understand the basics of
mortgage rates and how to get the best rate possible.
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MORTGAGE RATES 101:
HOW ARE MORTGAGE RATES CALCULATED?
To figure out how much interest you’re paying on your mortgage (which, of course, is determined by a mortgage rate), there’s
a simple calculation to see how much of your monthly payments goes toward the principal (how much you borrowed) versus
interest (the cost of borrowing).
How Interest Works
When you have a savings account at a bank, you typically earn interest. With a mortgage, you pay on the interest,
instead of earning it. Let’s take a look at an example of an interest-earning bank account to understand how interest
builds over time.
Let’s say you put $100,000 into a high-interest savings account that yields 5% compounded annually (in other words,
you’d multiply the principal ($100,000) by the interest percentage (5%) once per year).
If you begin with $100,000, after one year, you’ll make $5,000 in interest. $100,000 multiplied by 5% (100,000 x 0.05)
is $5,000. So at year two, your balance starts out at $105,000, and so on. After 10 years, you’ll end up with a total of
$155,132.83. Check out this table to see how we got there:
Year
Principal
Interest You Earned that Year
1
$100,000.00
$5,000.00
2
$105,000.00
$5,250.00
3
$110,250.00
$5,512.50
4
$115,762.50
$5,788.13
5
$121,550.63
$6,077.53
6
$127,628.16
$6,381.41
7
$134,009.57
$6,700.48
8
$140,710.05
$7,035.50
9
$147,745.55
$7,387.28
10
$155,132.83
$7,756.64
The interest on a mortgage works just the same way, but instead of earning interest on the money, you’ll be paying
interest on it since you’re the one borrowing it. So let’s say that you have a $100,000 mortgage with a 5% interest rate.
How much would you have to pay at that 5% interest rate?
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MORTGAGE RATES 101:
HOW ARE MORTGAGE RATES CALCULATED?
Well, each year, you would owe 5% of the principal, so at the very least, you’ll pay $5,000 a year. If you gave your mortgage
company $5,000 in that first year, it would only cover your interest, and your remaining principal (the amount borrowed) would
be left unpaid. That’s why you would have to pay more than $5,000 to pay off part of the principal.
For this example, and to keep things simple, let’s say you can afford to pay $6,000 a year. That means each year you can afford to
pay the 5% interest, plus a little more. The table for a $100,000 mortgage with a 5% mortgage rate would look something like this:
Year
Principal
(Amount You Owe)
Interest
Owed That Year
Your Payment
Per Year
1
$100,000.00
$5,000.00
$6,000
2
$99,000.00
$4,950.00
$6,000
3
$97,950.00
$4,897.50
$6,000
4
$96,847.50
$4,842.38
$6,000
5
$95,689.88
$4,784.49
$6,000
6
$94,474.37
$4,723.72
$6,000
7
$93,198.09
$4,659.90
$6,000
8
$91,857.99
$4,592.90
$6,000
9
$90,450.89
$4,522.54
$6,000
10
$88,973.43
$4,448.67
$6,000
So after 10 years, you still owe over $88,000 because even though you’ve paid $60,000, the majority has gone toward interest
each year.
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MORTGAGE RATES 101:
ADJUSTABLE MORTGAGE RATES
So far, we’ve only addressed fixed-rate mortgages, which are mortgages that have a fixed
interest rate that never changes during the life of the loan. Another option is an adjustable rate
mortgage, also known as an ARM. With this type of loan, the interest rate can fluctuate with
market changes. ARMs begin at a fixed rate (a 5-year ARM starts with a fixed interest rate
for the first five years of the loan), but after that period ends, the ARM adjusts with current
market rates.
ARMs are generally based on the LIBOR (London Interbank Offer Rate), which is the rate at
which banks pay on overnight deposits denominated in U.S. dollars in the United Kingdom.
The LIBOR is a more global version of the Federal Reserve’s fed funds rate.
WHAT DETERMINES MORTGAGE RATES?
Most people believe mortgage rates are set by the Fed, but this isn’t entirely accurate.
The Fed does influence mortgage rates, but markets actually set them.
Here’s How It Works
It all starts with the Federal Reserve (the bank of the U.S. government). The Federal Reserve sets one main rate called the
federal funds rate. This rate influences a whole slew of other federal monetary interest rates, such as the discount rate
and the prime rate. The discount rate is the rate at which businesses can borrow money from the Federal Reserve.
It provides emergency liquidity for corporations when they lack credit or assets and are unable to get cash and
securities elsewhere. The prime rate, on the other hand, is the absolute best rate available to consumers for shortand long-term debt ranging from credit cards to home mortgages.
The funds rate or fed funds rate is the interest rate that banks and depository institutions charge each other. You
might be wondering, “How does that work and when do banks borrow and loan to and from each other?” When banks
have excess reserve funds, they charge each other for overnight loans of those funds. The Federal Reserve has the
opportunity to adjust this rate eight times a year at the Federal Open Market Committee.
Depending on whether the Federal Reserve chairman and the regional Federal Reserve governors decide to raise,
lower or hold the rate, the Fed will then buy or sell mass quantities of treasury bonds in a process called open market
operations. Banks and other institutional buyers have permission to trade government treasury bonds in this market.
Traders need cash denominated in U.S. dollars to participate in the Fed’s bond market, and the addition and removal
of that cash functionally increases or decreases the rate as liquidity becomes more or less scarce.
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MORTGAGE RATES 101:
WHAT DETERMINES MY MORTGAGE RATES?
Interest rates also are influenced by a variety of other factors, including consumer sales, inventories, imports, exports and employment.
The key idea is that since interest rates are technically the price of owning money, things that make more money available in the
economy will increase interest rates. For instance, more employment means that households are spending more money in the
economy. As more money becomes available, rates will increase.
What Do These Rates Have to Do with Mortgage Rates?
When the Federal Reserve raises or lowers its rates, mortgage rates usually fluctuate in a similar pattern. This is because
consumers, as the main drivers of the economy, tend to desire more money when the Fed lowers their rates. We increase
our demand for money by taking out loans to invest in capital. We pull our money out of savings accounts because the
interest rates are too low.
But when we spend more, this tends to lead to inflation. There is a surplus of dollars, diminishing their value in the
marketplace. Inflation then leads to increased mortgage rates. So this must be monitored carefully by the Fed, or inflation
can become a major problem as it did in the 1970s. The Fed also buys treasuries or securities to lower interest rates, as
they are backed by mortgages. This is often used to increase demand, as people borrow more when interest rates are lower.
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MORTGAGE RATES 101:
WHAT DETERMINES MY MORTGAGE RATES?
You’ve learned what rates are and how they’re affected by the Fed and the economy. Here’s the fun part: Do you know how the
mortgage rate you’re offered is determined? You might be surprised to learn that there is actually no single rate at a given time.
In fact, there are many factors that make each individual’s mortgage rate different. Here’s a list of factors that can impact the
mortgage rate you get.
Your Credit Score
To qualify for the best mortgage rates, you’ll
usually need a score of 740 or higher. To
get a free credit score and free credit report,
check out Quizzle.com. They offer a credit
improvement tool to help you reach your
goals.
Points Purchased
Points? What are those? A point (also called
a discount point) is prepaid interest on your
mortgage. Each point shaves an average
of about ¼% off your interest rate and costs
1% of the total loan amount. So, if you get a
loan for $100,000, then one point is $1,000.
Shaving off ¼% can save you thousands in
the long run, depending on how long your
loan period is and how long you keep your
mortgage. Talk to one of our Home Loan Experts to find out where the break-even point for buying points is for you. If it’s
22 months, after 22 months of paying your mortgage, you’ll have a lower payment for the life of your loan. Let’s say that
buying points can lower your payment by $50 a month. If it takes two years to break even on your points, and you keep
your mortgage for another 28 years, you’ll enjoy 28 years paying $50 less a month than you would have if you didn’t
purchase the points.
Down Payment Amount
The amount of your down payment and the type of loan you get also influence your mortgage rate. The larger your
down payment at closing, the better your mortgage rate will be. Also, not all mortgages have the same mortgage rate.
For example, ARMs often begin with a lower rate than conventional loans but later fluctuate with the market conditions.
FHA loans tend to have a slightly higher mortgage rate than a conventional fixed-rate loan of the same term.
For more information on which type of loan suits you and your family best, have your Home Loan Expert review and
explain your options.
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MORTGAGE RATES 101:
ARE RATES GOING UP OR DOWN?
Using our $100,000 example, the difference between a 5% interest rate and a
6% interest rate is $22,582.25 over the course of a 30-year loan.
Because of the reasons listed previously about how mortgage rates work, it’s
close to impossible to know exactly how the economy and market are going
to act from day to day.
When you see a low rate, you should take advantage and lock it in. Waiting
can be costly. If rates suddenly rise and you haven’t locked one in, that low
mortgage rate you were planning on might be gone forever. Talk to your
Home Loan Expert today to find out when you should lock in your low rate
with Quicken Loans. We’ll do everything we can to help you save money!
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MORTGAGE RATES 101:
MORTGAGE RATE RESOURCES
For more information on mortgage rates, check out the following list of resources offered by Quicken Loans and related sources.
Find Out Your Mortgage Rate Today
QuickenLoans.com/Mortgage-Rates
Call Us and Get a Quote in Seconds
(800) 251-9080
Sign Up for Mortgage Rate Alerts
QuickenLoans.com/Mortgage-Rates/Mortgage-Rate-Alerts
ADDITIONAL ARTICLES
Mortgage Interest Rates
QuickenLoans.com/Blog/Mortgage-Interest-Rates
Mortgage Rate Predictions
QuickenLoans.com/Blog/Mortgage-Real-Estate-Predictions-2014
Pros and Cons of 30-Year Fixed-Rate Mortgages
QuickenLoans.com/Blog/Pros-Cons-30Year-FixedRate-Mortgage
Pros and Cons of 15-Year Fixed-Rate Mortgages
QuickenLoans.com/Blog/Pros-Cons-15Year-Fixed-Mortgage
A Good Credit Score Gets You a Better Rate
QuickenLoans.com/Blog/What-Is-A-Good-Credit-Score
Using a Mortgage Amortization Calculator
QuickenLoans.com/Blog/Mortgage-Amortization-Calculator-Video
Mortgage Rates Explained
QuickenLoans.com/Blog/Mortgage-Rates-Explained
Federal Reserve
FederalReserve.gov
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License #356738; New Hampshire: Licensed by the NH Banking Department, #6743MB; New Jersey: Licensed Mortgage Banker – NJ Department of Banking, first (and/or second) mortgages only; New York: Licensed Mortgage
Banker – NYS Banking Department; Oregon: Quicken Loans Inc. – License # ML-1387; Pennsylvania: Licensed as a first Mortgage Banker by the Department of Banking and licensed pursuant to the Pennsylvania Secondary
Mortgage Loan Act; Rhode Island: Licensed Lender; Texas: Quicken Loans Inc., 1050 Woodward Ave, Detroit, MI 48226; Virginia: Quicken Loans Inc., NMLS ID #3030 (www.nmlsconsumeraccess.org); Washington – Consumer
Loan Company License CL-3030. Quicken Loans Nationwide Mortgage Licensing System #3030. Rates subject to change. Restrictions may apply.
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