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Mortgage Rates by Loan Product
Mortgage Rate ReportWednesday, April 25, 2018
Mortgage rates moved mostly higher on the week although there were also some positive signs as the market continued to respond to the Fed's increasingly hawkish stance on rates. In its March meeting, the Fed pointed to strong job growth, record low unemployment, an improving economic outlook and an expected boost in near-term inflation to justify its decision to raise the Federal Funds rate 0.250% to 1.500% to 1.750%.
The minutes from the March meeting also shed more light on the Fed's more aggressive outlook on rates. Fed members were unanimous in their forecast for higher inflation, accelerating GDP growth and additional interest rate increases in the future. The Fed meeting minutes highlighted the 2017 tax cuts and recently passed budget as potential economic catalysts, which is code for sources of inflation, while also recognizing the the negative effects of a possible trade war. In sum, the meeting minutes reinforced the Federal Reserve's aggressive forecast for interest rates with the market anticipating two more rate hikes in 2018 and four rate increases in 2019.
Mortgage rates were mixed in response to the meeting minutes as relatively little new information was released. Most lenders had already factored the Fed's March rate hike into their mortgage rate pricing and the expected number of future rate hikes remained unchanged despite the Fed's bullish tone. Over the past week, however, mortgage rates increased moderately as fears of a trade war receded and more positive economic news hit the market, although the news was not all negative for borrowers.
The interest rate for a 30 year fixed rate mortgage increased 0.125% to 4.375% while the interest rate for a 15 year mortgage climbed 0.125% to 3.875%. The interest rate on a 5/1 adjustable rate mortgage (ARM) also moved 0.250% higher to 3.875% as short term mortgage products became more expensive. In more positive news, FHA mortgage rates and VA mortgage rates were flat at 3.875%, with both programs appealing to borrowers focused on low or no down payment options, especially first-time home buyers. Jumbo mortgage rates were also steady at 4.375% while non-owner occupied mortgage rates remained at 4.625%.
The Federal Reserve's decision to increase interest rates in March was widely anticipated and its meeting minutes only made its long-term outlook more clear. Although there was a bit of a a delay, we are now seeing mortgage rates gradually move higher in response to the Fed. With the Fed reinforcing its forecast for multiple rate hikes in 2018 and 2019 (up to six!), prospective borrowers looking to buy a home or refinance their mortgage may be able to lock in a lower mortgage rate by acting now. While interest rates are challenging to forecast, the Fed's latest statement and meeting minutes underscore how higher inflation could yield more aggressive action on interest rates.
Because mortgage rates fluctuate daily, we continue to actively monitor the mortgage market for updates. Borrowers should check the FREEandCLEAR mortgage rate tables regularly to review customized, updated mortgage rates for lenders in their area. Our rate tables are free to use and require no personal information.
Why Select an Interest Only Mortgage
Lowest Initial Monthly Payment.
With an interest only mortgage you pay only interest and no principal during the for the first 3, 5, 7 or 10 years of the loan, which is called the interest only period. Additionally, your interest rate is fixed and does not change during the interest only period. Because you are not paying principal during the interest only period, your monthly payment is lower than the payment for an amortizing loan such as a fixed rate mortgage or an adjustable rate mortgage (ARM), when the borrower pays both principal and interest. The flipside is that at the end of the interest only period, your payment increases because your are required to start paying both principal and interest for the remainder of the loan term, which is usually 30 years. Plus, your interest rate can potentially increase during this period of the loan which would cause your payment to go up even more.
Larger Mortgage Amount.
The lower initial monthly payment provided by an interest only mortgage enables borrowers to afford a higher loan amount and buy more home. Being able to afford for a larger mortgage is one of the main benefits of an interest only mortgage. Borrowers who are enticed by the lower payment and higher mortgage amount offered by an interest only mortgage should also be aware of the possible payment shock in the future. Borrowers need to make sure that they can afford their monthly payment both at the beginning of the mortgage and over time when their payment is highly likely to increase.
Pay Down Principal on Your Terms.
An interest only mortgage enables borrowers to pay down principal based on their schedule as opposed to on a scheduled monthly basis like with a fixed rate mortgage or ARM. Borrowers can elect to pay down principal during the interest only period of the loan, even though they are not required to. When you pay down your principal mortgage balance during the interest only period, your required monthly payment also goes down. The flexibility to pay down principal when you want to makes interest only mortgages well suited for individuals who earn a modest monthly salary but a significant annual bonus. Borrowers in this position benefit from the lower monthly mortgage payments but can use a portion of their bonus to pay down their principal loan balance.
Your Are Going to Own Your Home for a Shorter Time Period.
If you know that you are only going to own your home for the length of the interest only period, then an interest only mortgage may be the right option for you. That way you benefit from the lower monthly mortgage payment during the initial interest only period but you are not exposed to an increase in monthly payment and possibly interest rate at the end of the interest only period when the loan starts to amortize. Keep in mind that with an interest only mortgage, you do not pay down your loan balance during the interest only period and therefore build no equity in your home unless your property value increases.
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More FREEandCLEAR Mortgage Resources
Our Interest Only Mortgage Calculator enables you to determine your initial monthly payment and worst case scenario for an Interest Only Mortgage using current interest rates
Review our comprehensive overview of how an interest only mortgage works including key loan program terms
Interest only mortgages are the riskiest type of mortgage. Borrowers should review the risks of an interest only mortgage to make sure they understand the serious downsides
Review the pros and cons of the three main types of mortgages (fixed rate, adjustable rate (ARM) and interest only) to select the mortgage type that is right for you