Simple way to Select the Best 5-Year Fixed Mortgage Rates from Lenders
Comparing mortgage rates among lenders might be more difficult than it appears.
It is critical to compare annual percentage rates (APRs) rather than just interest rates. The interest rate is a fixed percentage charged by a lender to borrow money; APR includes the interest rate, fees, and other closing expenses determined by the lender.
Lenders should, ideally, post APRs in addition to interest rates. If they do not, APR can be computed as follows:
- To begin, divide the total costs by the entire loan amount.
- Then divide the answer by the number of days in a year.
- Next, divide the total number of days in the loan’s term by the entire number of days in the loan’s term.
- Finally, multiply the value by 100 and add the percentage sign.
Examining the APR can provide you with a more realistic picture of the exact cost of your mortgage. Here’s an illustration:
- Lender A provides a 5-year fixed mortgage at 3% interest and 3.25% APR.
- Lender B provides a 5-year fixed mortgage at 3% interest and 3.175% APR.
There would be no difference if you merely evaluated the aforementioned mortgage offers based on interest rate. However, looking at the APR, you can see that Lender B is charging lesser costs, implying that the second mortgage offer is the better value.
When comparing mortgage rates, ensure that you are comparing similar mortgage packages, conditions, and amortization periods. Costs (such as house appraisal fees), prepayment penalties, portability, the convenience of the application process, and a lender’s customer service ratings are among essential factors to consider when comparing mortgage rates across providers. You should also look into mortgages offered by well-known institutional lenders as well as smaller, alternative lenders.
How is the interest rate on your 5-year fixed mortgage determined?
Fixed mortgage rates are determined by a variety of factors, including bond market activity and several considerations that are entirely dependent on each applicant’s unique personal and financial circumstances, such as the mortgage term and amortization period selected, the down payment amount, credit score, and income.
Government bonds are regarded relatively solid assets, thus financial institutions invest in them to generate a consistent profit flow. However, as interest rates rise, bond values fall, and banks lose money. Banks will then hike interest rates on fixed-rate mortgages to compensate for this loss.
Simply put, when the yield (the actual rate of return during the term of a bond) on 5-year government bonds trends up or down, 5-year fixed mortgage rates tend to follow suit.