What you should know about mortgage rates
If you're new to the home-buying process, dealing with mortgage rates might seem overwhelming.
Here are a few of the basics that every home purchaser should know.
You can choose either from an adjustable-rate market, often called an ARM, or a fixed-rate mortgage. An adjustable-rate mortgage is typically fixed for the beginning of the term and will then float after a certain period. For instance, a 5/1 ARM would mean that you pay a fixed rate for the first five years, after which the rate will adjust every year, typically according to the secured overnight financing rate (SOFR).
Some common term lengths for ARMs include 5/1, 10/1, and 7/1. You might also see ARMs such as 5/6, or 10/6, meaning the rate readjusts every six months instead of every year.
Banks typically offer a lower rate during the fixed period of ARMs than they do for fixed-rate mortgages because ARMs are lower-risk loans since there is basically no interest-rate risk for the bank once the rate floats.
Fixed-rate mortgages, on the other hand, tend to offer a modestly higher mortgage rate for the homebuyer, but are lower risk since the rate remains the same for the life of the loan.
Fixed-rate mortgages typically range from 10 to 30 years. A 30-year fixed-rate mortgage is the most common type of mortgage in the U.S. While shorter mortgage terms offer lower rates, the 30-year fixed-rate mortgage offers lower monthly payments than shorter fixed-rate mortgages and doesn't come with the risk of an adjustable-rate mortgage.
