Pamela Peredo

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When you are buying a home, it is important to know about the average mortgage interest rate. Buying a home is a large financial transaction, and saving money is a critical goal. Understanding what an interest rate is can help you make good financial decisions.

What is an Interest Rate?

To understand what an average mortgage interest rate is, you need to understand what an interest rate is before you buy a house. An interest rate is the amount a lender will charge for the use of the lender’s money. The interest rate is charged as a percentage of the amount you borrow. This interest rate is usually on an annual rate and is known as an annual percentage rate (APR). The interest rate is a rental charge for you to use the money from the lender. In the situation of a home mortgage, the interest is a fee for the money that you borrow from a lender. For example, if you borrow $10,000 from a bank for your home, the bank will expect you to pay back the loan and the interest for the right to borrow. An interest rate is a cost of debt (the rental of the debt) and the rate of return for lenders. When you are borrowing from a bank or other financial institutions, you are not simply borrowing from the bank but borrowing from other bank customers’ financial holdings. The bank or other financial institution pays the other customers with interest rates for the privilege of borrowing the other customers’ money.

What is an Average Rate?

An average mortgage interest rate is a snapshot of mortgage rates at any given time. This interest rate may change as the economy changes and national interest rates change.

Who Sets Interest Rates?

Average mortgage interest rates are influenced on a national level. In the United States, representatives of the Federal Reserve Board and the Federal Reserve Bank, creating the Federal Open Market Committee, has a forum that is held once per month for eight months annually. During the meeting, the forum assesses the country’s economic status to adjust interest rates according to the country’s economic needs.


While considering the average mortgage interest rate as a factor in deciding whether to buy a house, there are other factors. An important factor in mortgage decision making is the mortgage type you will use for your home. There are fixed-rate mortgages, amortized fixed-rate mortgages, non-amortizing fixed-rate loans, balloon payments with your loans, and adjustable-rate mortgages.

What Are Fixed-Rate Mortgages?

average mortgage interest rate

The mortgage rates you choose don’t depend solely on the average mortgage interest rate, but this depends on your financial situation as well as how long you plan to stay in your home. Fixed-rate mortgages are mortgages with fixed interest rates. These rates exist as long as you are paying the loan. Unlike adjustable-rate loans, the fixed-rate mortgage interest rate won’t change. Fixed-rate interest loans can be either amortized or non-amortized. The interest you will pay for a fixed-rate loan depends on the mortgage terms, as well as how long it will take you to pay off the loan. Banks usually offer fixed-rate mortgages of 30, 20 or 15 years, with varying monthly payments. 30-year mortgages are often popular because this mortgage offers the lowest monthly payment. However, a 30-year mortgage is costlier because you pay interest on the mortgage for a longer time. Shorter-term mortgages have lower interest costs because you pay off the mortgage sooner, but with higher monthly payments.

Amortized Fixed-Rate Mortgage Loans

When considering the average mortgage interest rate, you might consider amortized fixed-rate mortgage loans. With amortized fixed rates, the lender schedules the fixed rates of interest with installment payments. For example, the lender may ask the borrower to pay the mortgage monthly until the borrower pays off the loan. A borrower pays the debt and interest with each payment. As the loan matures, the lender will require the borrower to pay more of the main debt, but less interest with each mortgage payment.

Non-Amortizing Fixed-rate Loans

Non-amortizing loans are sometimes called balloon payments or interest-only loans. A balloon payment is when you pay a lump sum at intervals or at the end of a long-term balloon loan. Balloon payments usually require that you pay higher dollar amounts than regular mortgage payments. The benefits of balloon payments are that the initial money you pay is less than a standard loan agreement. Balloon payments often have lower fixed interest rates and smaller monthly payments. The interest is deferred and calculated based on the borrower’s annual interest rate. The disadvantage of balloon payments is that the interest is deferred. An interest-only fixed-rate mortgage loan requires borrowers to pay interest only on scheduled payments. Deferred interest rate is added to the lump sum payment the lender requires at the end of the loan. This can be costly with the accumulated interest added to the end payment.

Benefits of Fixed-rate Mortgages

Considering your choices with an average mortgage interest rate, you consider the fixed-rate mortgage. The primary benefit of fixed-rate interest rates is that rates do not change, making it easier for you to compare closing costs. Adjustable-rate mortgages require that you compare the closing cost of the loan as well as the introductory interest rates that may go up and down while you are comparing loan costs and rates. A fixed-rate mortgage could be the best choice if you need a set payment schedule at a consistent interest rate, without having to worry about rising interest rates. Fixed-rate mortgages also give you the option of a graduated payment that has lower payments to start, but with payments that gradually increase over time.

Downsides of Fixed-rate Mortgages

The greatest disadvantage of a fixed-rate mortgage is if interest rates fall, you can’t take advantage of the lower interest rates because your loan rate is fixed.

Who Benefits From Fixed-Rate Mortgages?

Not everyone benefits from fixed-rate mortgages with an average mortgage interest rate. People who would benefit from fixed-rate mortgages are those planning to stay in one house for a long time. Fixed-rate mortgages are long-term commitments over 15, 20, or 30 years.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARM) can be the best mortgage rates on the market, but not always. ARMs are a mix between fixed and variable interest rates, usually amortized loans requiring steady installment payments. An ARM is a fixed-rate interest in the first years of the loan, followed by a variable rate interest. The payment schedules for this amortization can be complex because parts of the loan mortgage interest rates are fixed and parts are variable mortgage interest rates. Hybrid adjustable-rate mortgages allow borrowers to choose fixed-rate terms before rates adjust to higher interest rates. These adjustable-rate mortgages are scheduled as 3/1, 5/1 or 7/1 with initial fixed-rates for three, five or seven years. ARM initial rates are often lower than a fixed-rate mortgage, but only for a short time. If you choose an adjustable-rate mortgage, interest on your loan falls with a drop in interest rates. However, lenders can have caps on how high an adjustable-rate can climb and how low the interest rates can fall.

Benefits of an Adjustable Rate Mortgage

Adjustable-rate mortgages are a bit of a gamble because the borrower bets that interest rates will fall in the future. If a borrower bets correctly that rates will fall, that borrower’s mortgage interest rate will decrease over time.

The Downside of Adjustable Rate Mortgages

The primary downside of adjustable-rate mortgages is that if interest mortgage rates rise you will pay higher mortgage interest rates on your loan.

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