Eli5 Why are they saying mortgage interest rates are at 7%? Wouldn’t your interest rate be based on your credit score like a car loan?
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They mean the general lowest mortgage interest rates. Like if you have a good credit score and a good down payment. This is the currently-advertised rate.
Certainly, there are higher rates out there.
They are, but they’re also based on where else someone can loan money out.
Basically, there’s a “prime rate”. This is the amount that the US borrows money at (slight oversimplification, I know); and because the US is basically guaranteed to pay back their debts, that’s the base line. If you aren’t guaranteed to pay back, you have to pay back a little bit more to compensate for the risk of you not paying back the money you borrow. The more likely you are to not pay the money back (which is measured by your credit score), the more you pay.
Now, there’s some exceptions to this. Home loans are sometimes lower than that because the bank knows that if you don’t pay back the loan, they can take the house and get at least some of their money back. Because of this, credit doesn’t necessarily matter as much (though it still does some), but it does matter. On the other hand, car loans risk something happening to the car (like you getting in an accident and being at fault) and them not being able to take it – and secondhand cars are less valuable anyway. So car loans see bigger rate changes based on your credit: both because you’re more likely to pay back the loan AND because people with better credit are more likely to take care of their stuff and therefore not get in an accident (side note: credit rating can play into insurance rates for these reasons too).
2 people I know who just bought a house had a 6.5 like 2 months ago and like 6.9 last week so I’m sure that’s not an exact number. It’s crazy either way though because when I bought my house in 08 I’m pretty sure I was at a 2.5 and in 2019 when my ex refinanced it under her name she got like a 1.9 or some shit.
Banks borrow money (your savings and deposits) and then loan money (home/business loans). The interest rate on the money they loan out (home loans) must be larger than the interest rate they pay out on the money they borrow (savings & deposits).
The central bank a.k.a federal reserve is another large pool of money that banks can borrow from. If the central banks increase their interest rates, in other words the fed increasing rates to fight inflation, then the banks must pay a higher interest rate for borrowing from the central bank. This means for a bank to stay afloat, they must also increase the interest rates on the loans they give out.
The federal reserve (your bank’s bank, who sets monetary policy for the United States) sets interest rates that banks can borrow money at. In order for banks to make money they mark up that rate and pocket the difference. The worse your credit score the higher the mark up because you represent a higher risk. When people discuss what the current mortgage rate is they are talking about the rate for someone with excellent credit, which is based on the rate set by the fed, with a few points of mark up.
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