Atlanta Mortgage Interest Rate Trends
For a fortunate few, cash is an option when purchasing a home. The average homebuyer, however, must depend on approval for a mortgage loan when financing a home. Often, the financing stage of a home purchase can be more complicated than deciding on which home to purchase. Because securing a mortgage loan is typically necessary though, it pays to understand the process.
An Atlanta mortgage comes in more than one variety. Understanding the different types of loan options and how they will affect your bottom line is important when financing a home. With interest rates on the rise, it is particularly important as a borrower to understand how your interest rate will affect your Atlanta mortgage.
Fixed vs. ARM – the Basics
Mortgage loans come in two basic varieties – fixed and adjustable rate, or ARM. With a fixed rate loan your interest rate will not change for the life of the loan, meaning your monthly payment will remain the same for the life of the loan. Historically, a fixed loan was for a period of 30 years; however, 15 year fixed loans have gained in popularity in recent years.
An ARM, on the other hand, offers a fluctuating interest rate, meaning that your monthly payments will change throughout the life of the loan. In an ARM, the interest rate will remain the same during an initial period of time (commonly three, five, or seven years) after which the rate will be adjusted based on a complicated formula tied to what is known as the “index” and the “margin”. The frequency with which the rate can change is set at the beginning of the loan. In a 5/1 ARM, for example, the interest rate will remain the same for the first five years of the loan and will then be adjusted every year thereafter. Most ARMs also include a limit on how much the interest rate can change when it changes as well as a lifetime cap.
Understanding Interest Rates
Assuming all other factors are the same (credit score, employment history, loan amount etc.) a borrower can expect to pay a higher interest rate for a fixed Atlanta mortgage than for an ARM – at least during the base period. Lenders usually set ARM rates lower to attract borrowers, hoping to make money down the road if interest rates go up. Interest rates are also typically higher on a 30 year fixed rate loan than on a 15 year fixed rate loan.
Recent Interest Rate Trends
During the recent recession interest rates hit all-time lows; however, they are slowly starting to climb back up again. A 30 year fixed rate for an Atlanta mortgage loan in 2012 averaged 3.15 percent while a 15 year fixed rate averaged 2.5 and a 5/1 ARM averaged 2.3 percent. Those same loans today average 4.05 percent, 3.2 percent, and 3.0 percent respectively. For the economy in general, rising interest rates are generally an indication that the economy is heading out of a recession; however, for a borrower they make financing a home more expensive.
While a half of a percent may not seem like enough to bother arguing about, it can have a significant impact over the life of a loan. To determine how much a change in interest rate affects your monthly payments, imagine that you borrowed $200,000 using a 30 year fixed rate loan at an interest rate of 4.0 percent. To determine your monthly interest rate you divide 4.0 percent by 12 (0.04/12 = 0.0034). Then multiply the amount of the loan by your monthly interest rate ($200,000 x 0.0034 = $680). Therefore, the first $680 of your mortgage payment each month is interest. If you change the interest rate by a half a percent to 4.5 percent, it changes your interest payment each month to $760 (0.045/12=0.0038 $200,000 x 0.0038). Therefore, a half a percent change in your interest rate will result in you paying $960 more in interest each year ($80 x 12 = $960) which can add up over the lifetime of your loan.
If you have been considering a home purchase for some time, now may be the time to make your move before interest rates climb even higher. For some help on figuring out your prospective mortgage payments, check out our mortgage calculator!