Current Mortgage Rates

A home is one of the biggest purchases you'll ever make, and current mortgage rates are significantly higher than they were a year ago. You can save thousands of dollars simply by paying attention to the interest rate on your loan.

To land the best mortgage deal for you, shop around and compare quotes from multiple lenders. Ask for personalized quotes and a full rundown of your estimated monthly payment. You can do this without harm to your credit score. Keep reading to find out how.

What is a mortgage rate?

A mortgage rate is the interest rate you pay on the money you borrow to buy property. Mortgage rates are expressed as a percentage, and they represent the annual cost of the loan. However, mortgage interest isn't calculated annually -- it's usually calculated monthly. You can find out your monthly mortgage rate by dividing your mortgage rate by 12.

On a fixed-rate mortgage, the mortgage rate never changes. If you have an adjustable-rate mortgage, your interest rate can change after every adjustment period.

How a mortgage rate works

Let's say you get a mortgage for $100,000, and your mortgage rate is 4%. At the end of the first month, your lender charges interest equal to 0.333% (your 4% mortgage rate divided by 12) of your outstanding balance. In this example, that's $333.33.

If this is a 30-year fixed-rate mortgage, your lender has figured that you need to pay $477.42 per month to be free and clear at the end of the loan term. For the first month, then, your payment covers $333.33 in interest, and $144.09 goes toward the $100,000 balance.

Now you owe $99,856.33. Since your balance is lower, the interest charge is also a little lower. In the second month, your payment covers $332.85 in interest plus $144.57 towards the balance.

In this way, you make a little more progress against your principal balance each month over the life of the loan.

RELATED: How is a loan amortization schedule calculated?

What is a mortgage?

A mortgage is a secured loan that uses property as collateral. Most people who buy a home take out a mortgage to do so. You can also use a mortgage to get cash from a lender if you already have equity in a piece of property.

A mortgage is technically only the loan, but other costs might be included in your monthly payment. Many people make a single payment that covers their loan payment, property taxes, homeowners association dues, homeowners insurance, and mortgage insurance.

Mortgages are different from other loans in that they usually cost less than other loans, and the interest may be tax deductible.

How the history of mortgage rates affects home affordability

When interest rates are high, you get less home for your money. When rates are low, you can shop in a higher price range. In the 1970s, mortgage rates rose from 7% to more than 10%. In the 1980s, rates continued to climb, reaching higher than 18%.

The history of mortgage rates can show you how rate fluctuations affect home affordability. Here's what a home loan payment looks like at different interest rates:

If your housing budget was $1,000, you would not have been able to borrow $100,000 in the early 1980s. Today's rates are around 6% or 7%. At 6%, the payment on this loan is $599.55. So if you can afford $1,000 a month, you can probably afford a loan this size, plus property taxes, homeowners insurance, and homeowners association fees.

What is a good mortgage rate?

Whether a mortgage rate is good largely depends on context. Today, people who remember the 18% mortgage rates of the 1980s -- or even an 8% rate -- would probably say 6% is a good mortgage rate. Someone who bought a home in 2021 at 2.5% might not think 6% is a good rate today.

A better measure to consider when you are ready to borrow may be today's best mortgage rate. Get your credit score above the threshold for the lowest possible rate (usually 720, but sometimes 740). Save enough money to cover closing costs, moving expenses, and at least 5% down. Excellent credit, sufficient equity, and sufficient cash on-hand are the three main factors that can drive your mortgage interest rate down.

How can I find the best mortgage rate?

You can find the best mortgage rate by shopping around. In fact, the more lenders you compare, the more you may save on interest rates and fees. First-time home buyers may be eligible for affordable home loan programs. In addition, state and local governments often offer programs to support first-time home buyers. Talk to your local housing authority to learn more about your options.

Shopping around is just one way to find a low rate. You can also consider different loan options and configurations. Rates vary based on the type of loan you want, your down payment size, and your credit score. Each of these factors into your mortgage application and influences the rates available to you. If you're not finding the rates you expect, try looking at other types of loans, offering a larger down payment, or boosting your credit score.

For example, when looking at mortgages, you'll need to decide if you want an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. ARMs usually offer lower introductory rates. However, those rates usually increase after a time. A fixed-rate loan tends to offer a slightly higher interest rate -- but that rate is fixed for the duration of your loan.

How much can you afford to borrow for a home?

To figure out how much you can afford to borrow to buy a home, look at your income and your debts. The more debt you have, the less money at your disposal for a housing payment.

Add up all of your debt payments each month. Include any payment that you are required to make each month, such as:

• Car loan
• Personal loan
• Credit card minimum payments
• Timeshare fees
• Child support
• Alimony
• The minimum payment for any loan you cosigned, even if you are not the one who normally makes the payment (lenders count these payments)

Divide the total by your monthly before-tax income. The result is your DTI, or debt-to-income ratio. This is the figure lenders look at to decide how much of a monthly payment you can afford, and therefore, how much of a loan they will approve.

Ideally, you want the debt payments to total no more than about 28% of your before-tax income. Once you add your proposed housing payment (including property taxes, homeowners insurance, mortgage insurance, and HOA fees), you want the total to be 36% or lower.

What if it isn't? That's okay. Lenders can approve applicants whose DTI is 50% or even higher. Just keep in mind that spending that much of your income on debts could strain your finances.

A mortgage calculator can help you figure out the loan amount for the payment that works for you. Just pay attention to whether the one you use includes those extra costs above the actual loan payment. If not, you'll need to estimate and add them. You can Also, you'll have to take an educated guess at the interest rate based on your credit score. You'll get a customized interest rate from a lender after you apply.

RELATED: Thinking about buying a home and need to start saving? Check out The Ascent's guide to the best savings accounts.

How do I compare current mortgage rates?

When comparing current mortgage interest rates, start by comparing rates for the same type of loan. Compare 15-year loans to other 15-year loans, and fixed-rate mortgages to other fixed-rate mortgages.

Don't just read about rates online -- get pre-approved for a mortgage with multiple lenders. When you get pre-approved, lenders look at factors unique to you, such as your credit score, credit history, and down payment. This can help you more accurately compare different lenders.

Pre-approval is not always a commitment to lend. To get actual loan offers to compare you'll probably need to apply. To apply, you'll need to be ready to buy a home because most lenders require the property address.

Shopping around for the best mortgage lenders is best done in a short time frame because you're allowed to rate-shop without harm to your credit score. The three major credit reporting bureaus (Experian, Equifax, and TransUnion) encourage borrowers to shop around within a period of 45 days. You can apply with any number of lenders within this time frame. No matter how many applications you submit, the credit bureaus will only count one credit inquiry against your credit score.

Each lender you apply with should provide a loan estimate. This document outlines a loan's terms and fees. It includes the interest rate, closing costs, and other fees such as private mortgage insurance (PMI). You can compare all of these fees and costs to get a picture of which offers you the best overall deal. Loan estimates are usually good for about 10 days, so that's another reason to get your applications in within a small window of time. If you go ahead with a loan, there are limits to whether and how much a lender can change any of the details that are on your loan estimate.

If a lender doesn't provide a loan estimate, you might want to avoid doing business with them.

How are mortgage rates determined?

Mortgage rates are determined by a number of factors, including:

The overall economy

Adjustable-rate mortgages are influenced by the Federal Reserve. When short-term rates go up, so do ARM interest rates. Fixed-rate mortgages are determined by the 10-year Treasury rate. When that rate goes up, so do the interest rates for new fixed-rate mortgages (but not existing ones, whose interest rates cannot change). Fixed-rate mortgage rates may also fluctuate as lenders try to attract customers.

Your credit score

The higher your credit score, the more likely you are to qualify for the lowest rates. Check your credit report and score to see where you stand. It's worth noting that specialized government-backed loans (such as FHA loans and USDA loans) sometimes offer competitive rates for those who qualify, even if they have a less-than-perfect credit profile. There are also some mortgage lenders known for offering mortgages for poor credit.

Your loan-to-value (LTV) ratio

Your loan-to-value ratio is the home's price divided by the mortgage amount. If a home costs $250,000 and you need a $210,000 mortgage to purchase it, your loan-to-value ratio will be 84%, since you're borrowing 84% of the home's value. The higher the ratio, the higher your interest rate is likely to be.

Whether you buy points

Lenders sometimes offer borrowers a lower interest rate if they buy "points" or "mortgage discount points." Points are prepaid interest. A point usually costs you 1% of your mortgage amount (e.g., $1,000 per point on a $100,000 mortgage) and lowers your rate by one-eighth to one-quarter percent (the amount of the discount varies from lender to lender, and is also based on the details of your loan). Whether points are worth buying depends on how long you intend to live in the house -- for them to be cost-effective, you need to own the home long enough to save more in interest than you pay upfront. The longer you keep the house, the more likely you are to save money by purchasing points.

Other factors

If you're refinancing a mortgage, rates may be higher for a cash-out refinance. Lenders view mortgages for investment properties, second homes, and manufactured homes as riskier, so rates may be higher for those as well.

When should I lock in a mortgage rate?

You should lock in a mortgage rate if you find a rate you're comfortable with and you can afford the monthly payments. In some cases, home buyers will wait to lock in their mortgage rate just in case interest rates go down. But because interest rates are unpredictable, this is risky.

A mortgage rate lock guarantees your interest rate for a certain period of time, typically until your closing date. It usually lasts from the initial loan approval until you get the keys to your new home.

Locking in your rate isn't necessarily just about getting the best rate. A lock also protects you against any rate hikes that happen before closing. It can let you know from the beginning of the process what your monthly payments will be and help you avoid surprises come closing day.

It may seem like there's a lot to learn about buying a home, especially if you're a first-time buyer. If you're still feeling overwhelmed, check out our beginner's guide to home loans. It can help you navigate all the steps, including how to find the best mortgage rates today.

Other types of mortgages

You may hear about different types of mortgages. Here are some terms to be familiar with:

Fixed-rate mortgage and adjustable-rate mortgage

Most mortgages are fixed-rate loans. That means your rate never changes. If you have an adjustable-rate mortgage, your interest rate can change after every adjustment period. The rate could go up or down.

Conventional loan and government-backed loan

A conventional mortgage is any home loan not insured by the federal government. A government-backed mortgage is insured by a federal agency. For example, the Department of Veterans Affairs insures VA loans. The lender takes less risk with a government-backed mortgage, so it's usually easier to qualify.

Conforming loan and jumbo loan

The amount you can borrow with a government-backed mortgage is capped. These limits are called conforming loan limits. Lenders rely on these limits even for loans that are not government-backed. For example, conventional loans are usually capped at conforming loan limits. Loans above these limits are considered jumbo loans.

Interest-only loan

If you have an interest-only loan, you only have to pay the interest each month. If you pay only interest, your principal balance never goes down. If you borrow $100,000 at 4%, you can pay $333.33 each month. You will continue to owe the full $100,000.

Why would someone want a loan that is never paid off? Usually because they plan to sell the property or refinance the loan soon, so they want to minimize the short-term out-of-pocket costs.

Construction loan

A construction loan covers an empty lot plus enough money to build a new home. The money is disbursed to the builder in installments as the builder shows the lender that milestones are reached. Usually, the borrower only has to make interest payments during construction (and interest is only charged on the money that has been disbursed). This is a helpful feature, because most borrowers are still paying housing expenses somewhere else while their new home is being built. The construction loan is converted to a traditional mortgage when the home is completed.

Renovation loan

If you want to buy a home and do significant renovations before moving in, a renovation loan might help you. The loan covers the home purchase price plus enough to do the renovations. Like with a construction loan, the lender keeps tabs on the work that's done and may disburse funds directly to contractors.

Reverse mortgage

A reverse mortgage is for older borrowers (62 or older) who have equity in a home. A lender gives you money, provided you have sufficient equity in the home. You can get the cash as a lump sum, a monthly payment, or a line of credit. A reverse mortgage does not have to be paid back until you die or sell the home. You are still responsible for home upkeep, property taxes, and homeowners insurance. A reverse mortgage has downsides, and is not right for everyone.