30 Year Home Mortgage Interest Rates – How They Are Determined, and the Payment Options You Have

30 year home mortgage interest rates can be paid in a number of ways, and depending on a variety of factors, some ways may be better or worse for you. In order to make the best decision, you need to have a comprehensive understanding of 30 year home mortgage interest rates, beginning with:

Interest

Like many things in life, a house isn’t something that the vast majority of people can simply pay off in one day. They require a loan from a bank or a lender. So, what incentive would they have to loan someone all that money in the first place? Their incentive is to make money from the loan by charging a fee for it – that is interest. When you take a loan from a bank or lender, you are expected to pay back the loan, plus interest on that loan, over a set period of time.

Simply put: Interest is what it costs you to use someone else’s money.

  • The borrower is the one who takes a loan and pays interest. They only take the loan if they believe that it is valuable enough for them to justify paying it back, plus interest, over time.
  • The lender is the one who provides the loan and collects interest. They only offer the loan if they believe it to be a good long-term investment.

The amount of interest is usually calculated as a percentage of the loan. When it comes to 30 year home mortgage interest rates, you usually simply pay an extra amount of money on every payment you make back for the loan. This way, the interest, like the loan, is paid off a little bit at a time.

So, what is an interest rate? It’s the amount of interest you pay on your particular loan.

How Are 30 Year Home Mortgage Interest Rates Determined?

This is where things become a bit more complicated. Your 30 year home mortgage interest rate is determined by a number of factors, some of which are under your control, some of which are not.

30 year home mortgage interest rates are determined by:

  • Your credit score
  • The amount you can pay as a down payment
  • The size of the loan you want
  • The location (state) of the house you want

These are the factors that you can control. On the part of the lender, these factors affect 30 year home mortgage interest rates because of risk. After all, the lender is taking some degree of risk lending to you or anyone else. They want to assume you can pay what you owe, in the time you agree to pay it. Your credit score can show a degree of risk in that it’s a reflection of how responsible you are with money. The amount you can pay as a down payment can represent a degree of risk in that it determines how much you have left to pay going forward. The size of the loan you want represents a degree of risk in that it can determine how much time it will take you to pay off. The location (state) of the house you want can represent a degree of risk in that states differ in terms of the average number of lenders who end up being able to pay their debts on time.

All of these factors put you anywhere from being low risk to high risk. These are going to affect your 30 year home mortgage interest rates.

Now, for the factors you can’t control:

  • Supply and demand – At any given time, lenders are balancing the amount of money they are lending, with the amount of interest they are collecting. This can affect your interest rates. If they are making a lot of interest, your rates will probably be lower. If they are lending a lot of money out, your interest rates will probably be higher.
  • How inflation affects the value of the dollar – Lenders will decide to raise or lower interest rates depending on the value of the dollar. If the dollar is lowered in value, interest rates will be higher. If the dollar is raised in value, interest will be lower.
  • Federal funds rate: The U.S. Federal Reserve lowers or raises their rate of funds in order to keep the economy balanced. This will affect your 30 year home mortgage interest rates.

Options for Paying Your 30 Year Home Mortgage Interest Rates

Fixed Rate Mortgage

This is the most common ways people pay their 30 year home mortgage interest rates. A fixed rate mortgage is, as the name implies, a fixed rate that you pay throughout the lifespan of the loan. Your monthly payments will be as consistent as possible, and essentially it is only changes in your homeowner’s insurance or property taxes that will change your monthly rate.

Most fixed rate mortgages are amortized, meaning your monthly payments are used to pay off both the principal (the original sum of the loan) and the interest.

Pros and Cons of a Fixed Rate Mortgage

Pros:

  • You don’t have to worry as much about market fluctuations affecting your 30 year home mortgage interest rates.
  • They aren’t too complicated, and are generally easy to understand. It’s easier to shop for a fixed rate mortgage.
  • They accommodate more people’s income, as most people have a relatively consistent income, rather than one that can easily be changed.

Cons:

  • Just as you are protected from interest rate fluctuations, you also don’t benefit from them. If interests rates were to drop, you still have to pay the fixed monthly payment.
  • Fixed rate mortgages are generally higher in terms of interest than adjustable rate mortgages.

Adjustable Rate Mortgage

Adjustable rate mortgages usually include interest rates at about 2 to 3 percent below fixed rate mortgages. That means you have more options available, and may be able to purchase a more expensive home. However, they are not fixed, and that means your 30 year mortgage interest rates are at the mercy of market fluctuations. If interest rates go up, so do your monthly payments. If they go down, so do your monthly payments.

There are also options that combine fixed rate mortgages with adjustable rate mortgages, in which you pay a fixed rate for a number of years and then switch to an adjustable rate.

Pros and Cons of an Adjustable Rate Mortgage

Pros:

  • They give you more options, allowing you to purchase a more expensive house.
  • They are flexible, which can give many people more freedom.
  • They offer advantages if interest rates drop.

Cons:

  • They can be unpredictable.
  • They can be stressful if you rely on a steady monthly income.
  • They are more complicated than fixed rate mortgages.
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest