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Mortgage Rates

What are mortgage rates and how do they affect mortgage payments?

There are many different types of home loan arrangements, but generally, buyers only put down around 20% or less of the price of the property and borrow the remaining portion.

The loaned amount (the principal) must be paid back with interest over a specified period. 30-year loan repayment schedules are most common but 20, 15, and even 10-year terms are available. Lenders use amortization formulas to create monthly payment schedules.

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The interest rate on a mortgage depends on many factors:

  • Price of the property
  • Down payment size
  • Type of loan (fixed or adjustable-rate)
  • Loan term (length of repayment period)
  • Borrower credit score
  • Debt-to-Income (DTI) ratio (percentage of the borrower’s income devoted just to serving their debts)
  • Loan-to-Value (LTV) ratio (the mortgage amount compared to the appraised value of the property, where a higher LTV indicates more risk for lenders and hence a higher interest rate for borrowers)

There are two main types of mortgages: fixed and adjustable-rate.


Fixed-Rate Mortgage: The interest rate never changes and loan payments are the same every month


Adjustable-Rate Mortgage (ARM): The interest rate can be adjusted up or down after an initial lock-in period

ARM loans are typically available with a lower initial interest rate than fixed-rate mortgages, but they can change as often as once a year after the initial lock-in period. However, the terms of the loan will specify certain limitations such as how widely the interest rate can fluctuate, how frequently it can be changed, and a cap on the maximum possible rate.

Mortgage interest rates are adjusted in response to changes to leading financial indexes. For example, the interest rate of one-year U.S. Treasury bonds and the federal funds rate (a target set by the Federal Reserve for commercial banks to use when borrowing from each other) are often tied to ARM rates.

Inflation can also affect mortgage rates. When the value of the dollar fails to keep pace with increasing costs for goods and services, mortgage rates also generally increase.