30-Year Fixed Mortgage Interest Rates
It is critical that consumers and investors familiarize themselves with mortgage products and the interest rate environment, before making the commitment to purchase real estate. The Federal Reserve Board leverages monetary policy as a tool to influence mortgage interest rates and the aggregate economy. From there, 30-year fixed mortgage rates vary according to the credit profile of each borrower.
Fixed Versus Adjustable Rate Mortgages
Mortgages are categorized into adjustable and fixed-rate mortgages. Adjustable-rate mortgages (ARMs) feature interest rates that shift alongside the economic environment, while fixed-rate mortgages charge level rates throughout maturity.
30-year fixed mortgages charge the same principal and interest payment for thirty years. 30-year fixed mortgage rights are generally higher than 15-year mortgages, because of the increased risks of time. In effect, the additional 15 years provide more opportunities for borrowers to be laid off, suffer from hospitalization, or manage failing businesses that adversely affect the ability to make timely mortgage payments. Banks must also compensate themselves for long-term inflation, which reduces the purchasing power of mortgage payments over time.
The Federal Reserve Board
Federal Reserve monetary policy affects fixed 30-year mortgage rates. The Fed trades government securities, or U.S. Treasuries to manage the money supply. To lower interest rates, the Fed buys treasuries to increase the money supply. Alternatively, the Fed sells treasuries to support higher interest rates.
Federal Reserve monetary policy specifically targets the federal funds rate. Banks post reserves at the Fed, for the stability of the financial system. Banks often take out overnight loans from each other to meet their reserve requirements. Interest is charged on these loans at the federal funds rate. The federal funds rate is a benchmark, or comparison standard for 30-year mortgages. Banks offer 30-year mortgages at higher rates than the federal fund rate, as compensation for the increased risks. Homebuyers can expect lower interest rates amid recession.
30-year fixed mortgage rates, of course, vary according to individual chances for default. Applicants that maintain strong personal balance sheets featuring large amounts of assets backing relatively minimal debt levels are better able to negotiate lower interest rates. Alternatively, prospective borrowers that arrive at the bargaining table with weak cash flow levels and a history of missed loan payments should expect to pay high interest rates, if their application is not rejected, altogther.
Consumers should verify that credit report information is correct, prior to moving forward with the mortgage loan application process. Experian, Equifax and TransUnion are the three major credit-reporting agencies. Americans also carry rights to access one free credit report per year through annualcreditreport.com.
Again, The Federal Reserve Board usually lowers interest rates amidst recession. During these times, consumers may leverage cheap 30-year mortgage financing to buy affordable real estate. Meanwhile, existing homeowners often elect to take out new mortgages to refinance old loans. Alternatively, the Fed typically works to drive mortgage rates higher amid economic expansion, in order to control inflationary risks. Higher interest rates may actually benefit rental properties, because consumers are then less likely to explore homeownership.
42 out of 54 business economists surveyed as part of a 2010 Wall Street Journal study agreed that low mortgage interest rates contributed to the early 2000s housing bubble. Cheap money attracts speculators, who take out mortgage loans to bid up prices to unrealistic levels. Over time, high real estate prices reduce overall demand, which inevitably leads to the collapse of property values.