Having a fixed-rate payment means the loan you took out has an interest rate, in the form of a percentage, that can not be changed during the life of that loan. That rate is set when you are approved and take out the loan and lasts the length of loan or until it is paid off. Fixed-rate loans are easy to understand, and vary little from lender to lender.
What Determines Interest Rates?
Interest rates fluctuate for the same reasons home prices change; a result of supply, demand, inflation, and even the employment rate can all impact interest rates. As rates are changing every day, lenders are often keeping an eye on economic indicators in order to determine their current rate.
Aside from rates being based on the current economic news, lenders will offer different rates based on additional factors, including credit history.
History & Today’s Interest Rates
In the early 1980s, prices were rising fast and inflation was running rampant as a result of the oil crisis and government overspending. The Federal Reserve (Fed) raised interest rates with the annual average between 1980-1981 being 16.6% in response in order to bring both the economy and inflation to a standstill.
Similarly, as the economy adjusts to the changes and impact of the pandemic, inflation has been the highest that it has been in 40 years; and it continues to remain higher than expected. This has contributed to the raise in interest rates significantly, since the beginning of 2022.
The average 30-year fixed interest rate was at 5.5% in the beginning of August. While it is not much different than the previous week, lenders are constantly watching for any economic red flags and to see if the Fed will make any changes.
Back in May of 2022, the Fed raised interest rates by 50 points and continued to raise rates by 75 points in June, and 75 points in July. While the Fed does not directly set interest rates on loans, loan and mortgage rates usually move in the same direction as the federal funds rate.
Benefits of a Fixed Rate Loan
The main advantage of a fixed-rate loan is that the borrower is protected from sudden, and potentially significant, increases in monthly loan payments if there is a rise in interest rates. Having a fixed-rate provides a good sense of security as the loan payments are predictable – regardless of the state of the economy – and would protect borrowers from the spike in interest rates that has occurred in the summer of 2022.
Additional benefits to having a 30-year fixed-rate loan include:
Lower, more affordable monthly payments
Ability to qualify for higher loan amounts
Predicable payments every month
Low rates locked in for 30 years
Assuming a loan offers identical principle balances, a 30-year fixed-rate loan offers the lowest monthly payment, compared to other fixed-rate loans. Since it is common for borrowers to qualify for a loan based on the monthly payment, a 30-year fixed-rate loan would allow a borrower to pursue either a higher loan or additional loans for multiple investment properties.
At First Equity Funding, we have 30-year fixed rate financing options available for borrowers ready to grow their investment portfolio. Contact us today to learn more about our fixed-rate loan programs!