Mortgage Interest Rates: What You Need to Know

Bought my first house in 2019. Got a 3.75% rate and thought that was pretty good. Then 2021 hit and people were getting 2.5%. Felt like an idiot. Then 2023 happened and rates shot to 7%. Suddenly 3.75% looked genius.

Point is: mortgage rates are weird, unpredictable, and matter more than almost anything else in the home buying process. Here is what I have learned the hard way.

The Basics (Because You Need Them)

Your mortgage rate is basically the rental fee for borrowing money. Lender gives you $300,000, you pay them back plus interest. That interest rate determines how much extra you are paying over the life of the loan.

And we are talking big numbers here. On a $300k loan over 30 years, the difference between 6% and 7% is like $70,000 total. Seventy thousand dollars. For one percentage point. This stuff matters.

What Makes Rates Go Up or Down

Wish I could tell you there was some formula. There is not really. But here is what I have pieced together:

Your Credit Score

This one is in your control at least. 740 or higher gets you the best rates. 700-739 is fine. Below 670 and you are paying extra – maybe a full percentage point higher.

Before I bought, I spent 6 months obsessively paying down credit cards and making sure everything was perfect. Worth it. Got a better rate than I expected.

The Fed (Sort Of)

The Federal Reserve does not set mortgage rates directly, but they influence them. When they raise rates, mortgages usually go up. When they cut, mortgages usually drop. Usually. Sometimes the bond market does its own thing and rates move differently than expected.

I tried to time my refinance based on Fed announcements once. Did not work out. Rates did the opposite of what everyone predicted. So… take the experts with a grain of salt.

Loan Term

15-year mortgages have lower rates than 30-year. Like, noticeably lower. The trade-off is your monthly payment is way higher. My parents did a 15-year and I still do not know how they afforded it. I went 30-year because I like being able to eat.

Down Payment

Put down 20% and you usually get a better rate. Plus no PMI, which is basically extra insurance you pay for being risky. I put down 15% – could not quite get to 20 – and had PMI for two years until I built enough equity. That was like $180/month I would rather not have paid.

Fixed Rate vs. ARM – My Strong Opinion

ARMs (adjustable rate mortgages) start lower but can jump up. Fixed rates stay the same forever.

I know people who got burned by ARMs in 2008. Like, lost their houses burned. So I am probably biased. But in what world do you want your biggest monthly expense to be unpredictable?

The only scenario where an ARM maybe makes sense: you KNOW you are selling in 3-5 years. Maybe a job relocation situation. Even then, I would probably go fixed just for peace of mind.

Shopping for Rates

Here is something I wish I had known: rates vary A LOT between lenders. I got quoted 4.1% from one bank and 3.75% from another. Same day, same loan amount, same credit score.

Get at least 3-4 quotes. Yes, it is annoying. Yes, you will get calls from loan officers for months. Worth it.

Also, do not just look at the rate. Look at APR, which includes fees. A lower rate with $5,000 in fees might actually cost more than a slightly higher rate with $2,000 in fees. Math it out.

Rate Locks

Once you find a rate you like, lock it. Rates can change daily. A rate lock means they cannot raise it on you while you are closing (usually 30-60 days).

I locked mine at the right time apparently – rates went up 0.25% during our closing process. Felt lucky honestly. Could have gone either way.

Discount Points

You can pay upfront to buy a lower rate. One point = 1% of the loan amount = usually about 0.25% rate reduction.

Is it worth it? Depends how long you are staying. If you are there 10+ years, probably yes. If you might sell in 5, probably no. I did not buy points because I was not sure about the house long-term. Turned out I stayed, so maybe should have bought them. Who knows.

The Economy and All That

Inflation high = rates usually go up. Economy booming = rates usually go up. Recession fears = rates usually drop. Banks want more people buying, they lower rates. Banks are slammed with applications, rates go up.

I say usually because there are always exceptions and I have been wrong trying to predict this stuff before.

My approach now: if rates are at a level I can afford and I want to buy a house, I do it. Trying to time the market is for people smarter than me.

What Actually Happened to Me

Bought at 3.75% in 2019. Rates dropped to like 2.5% in 2021. Refinanced down to 2.875% (could not quite get to 2.5% for some reason – probably my debt-to-income ratio). Closing costs were around $4,000 but the monthly savings made that back in about 18 months.

Then rates shot up to 7% and I felt like I had won the lottery just by accidentally timing things right. Obviously I had no idea what was coming – just got lucky.

The Real Takeaway

Mortgage rates matter enormously but you cannot control them. You can control your credit score, your down payment, and how many lenders you talk to.

Do not obsess over getting the absolute lowest rate in history. Get a rate you can afford, on a house you can afford, and move on with your life. The people who wait forever for the perfect rate often never buy – and pay rent the whole time they are waiting.

At least that is my take. Rates are at whatever they are at right now. Work with what is available.