A home is one of the most expensive purchases you’ll ever make. Don’t go into the mortgage loan or refinancing process without a clear idea of what to expect.
This article is a simple California mortgage rate guide. It can be used as a reference to check the current mortgage rates, learn what drives those rates, and consider the housing market’s future.
Current California Mortgage Rates
If you’re looking to obtain a mortgage or refinance a home, it’s crucial to understand the market. What are mortgage rates right now? How have rates been changing over the last 6-12 months, and how are they likely to change in the future?
Understanding the market can help you secure a manageable monthly payment without sacrificing what you need in a home. Let’s examine the mortgage rates you can expect in California and the factors impacting those rates over time.
Common Mortgages in California
California has five main types of mortgages that most consumers or investors use: California Housing Finance Authority (HFA), Federal Housing Administration (FHA), Veteran’s Administration (VA), Jumbo, and conventional. Each type has a different standard rate.
Keep in mind that the standard mortgage rate can be expressed in two ways: the mortgage rate alone or the Annual Percentage Rate (APR). The APR includes both the mortgage rate and the other fees involved in a loan. Some loan types have lower fees, while others may have more built-in costs that push the effective mortgage rate higher for the borrower.
California Housing Finance Agency
Some low-to-middle-income first-time homebuyers can obtain California Housing Finance Agency (HFA) loans. The rates vary depending on the borrower, and they offer standard rates and slightly lower rates for low-income borrowers.
California FHA Loans
FHA loans are given out by lenders but are backed by the government through the Federal Housing Administration. These loans are typically for first-time homebuyers with smaller down payments.
California VA Loans
Veterans Affairs (VA) loans are offered with low-to-no down payment options for military service members, veterans, and eligible spouses.
California Conventional Loans
Conventional loans are standard mortgages offered to all eligible homebuyers throughout California.
California Jumbo Loans
Loans exceeding the maximum amount set by the Federal Housing Finance Authority (FHFA) are considered jumbo loans. Their rates tend to be similar to conventional mortgage rates.
Average Monthly Mortgage Payments in California
The average monthly mortgage payment in California in early 2024 was $2,576. This is significantly higher than the national average of $1,402 in the same year.
California consistently ranks as one of the most expensive states to live in, with living expenses and mortgage costs higher than others. Although the mortgage rates in California are close to national averages, homes in the state tend to cost more than homes in other states.
Factors Influencing Mortgage Rates in California
Homebuyers don’t always receive the average mortgage rate for their loan. Your mortgage rate can be affected by factors like your credit score, the size of your down payment, the local economy, the market you’re buying in, and specific local regulations in California.
Let’s explore these factors and how they can impact your mortgage rate.
Credit Score
While credit score is not the only thing a lender will look at, the general principle is that a higher credit score helps you secure a better mortgage rate. Your FICO credit score gives lenders a quick metric to check how reliably you manage debt. Borrowers with lower credit scores are viewed as a higher risk than those with higher credit scores.
With a credit score of at least 580, you may qualify for a mortgage with a high interest rate or an FHA mortgage loan. Once your credit score reaches 670 or above, you’ll likely qualify for a competitive mortgage rate. Credit scores above 740 are considered excellent, helping you get the best rates available.
Borrowers can sometimes reduce the impact of a low credit score by bringing a larger down payment, paying for mortgage insurance, or having a co-signer for the loan.
Down Payment
A down payment is the initial payment made to the lender when you close on a house. The size of your down payment can affect your mortgage interest rate by increasing or reducing your risk in the eyes of the lender.
A higher down payment leads to less risk for the lender since you’re borrowing less, and you own more of the equity upfront. Since the home itself is used as collateral for a mortgage loan, paying for more equity upfront puts you in a better position by reducing the amount you need to borrow and providing a higher-value asset for collateral.
Typical advice is to have a down payment of at least 20%, but it’s not strictly necessary to obtain a mortgage. With a good enough credit score, you can likely get a mortgage with a 3-5% down payment.
Some mortgage types are specifically made for people who cannot afford a high down payment. The main options are FHA loans, VA loans, and California HFA loans. Minimum down payments for each are as follows:
- FHA loans: 3.5%
- VA loans: 0%
- California HFA loans: 3%
These loans are mainly reserved for first-time homebuyers who meet specific criteria. With a low down payment, you will likely also have to pay for mortgage insurance, which can increase your monthly payments until you’ve acquired at least 20% equity in the home.
Economic Conditions
The economy, nationally and within California, strongly impacts mortgage rates.
These are a few of the main economic factors and how they can affect your mortgage rate:
- Inflation: Higher inflation causes home prices to increase, but it can also cause an increase in mortgage rates. Lenders have to ensure they’re making a return from their loan by outpacing inflation, pre-empting the diminishing purchasing power of money. Once inflation slows down, mortgage rates also tend to decrease. Inflation contributes to mortgage rates but usually will not cause a significant increase or decrease unless there is an extreme change in inflation rates.
- Fed interest rates: While the Federal Reserve (the Fed) does not dictate national or state mortgage rates, it controls the interest rates lenders have to pay to borrow the money they need to operate. These costs are passed on to borrowers through mortgage rate changes. Mortgage rates generally increase when the Fed raises interest rates and decrease when the Fed reduces interest rates.
- Economic growth: Generally speaking, a stronger economy leads to higher mortgage rates, while a weaker economy leads to lower mortgage rates. A strong economy usually means higher employment rates and wages, which drives up demand for houses and reduces the available supply. The opposite is true for weaker economies.
Nothing in the economy happens in a bubble. These three factors have some of the most significant impacts on mortgage rates, but rates can also be impacted by the local housing market where you’re buying.
Housing Market Dynamics
Just like a strong economy can lead to higher mortgage rates, a competitive housing market can also increase them.
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Hot markets where homes are in high demand tend to have higher mortgage interest rates. Mortgage rates tend to follow demand cycles. When demand is high, mortgage rates increase, but when demand lowers, mortgage rates also go down.
Lenders have a limited amount of funds they can loan out. When demand for homes is high, those funds are in higher demand, leading to increased mortgage rates.
One factor that can shift this dynamic is housing inventory. A tight housing supply can force interest rates to reduce as buyers struggle to find and afford homes on the market. This impact is only seen with low housing inventory over a more extended period of time.
California-Specific Regulations
California does not currently have any regulations that strongly impact mortgage rates within the state. While mortgages through unlicensed brokerages have a maximum interest rate of 10% annually, mortgages from a licensed broker or lender do not have any state-mandated interest rate cap.
Historical Trends in California Mortgage Rates
Mortgage rates in California fluctuate over time. Rate changes should be expected throughout the year depending on the factors discussed above.
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In an average year, mortgage rates are highest during the peak buying months in spring when real estate markets are hottest. They tend to go back down again during summer, with minor fluctuations through autumn and winter.
Outside the usual fluctuations, California has seen several more significant swings in mortgage rates over the last three years because of changing economic conditions. Let’s take a closer look at some of the major shifts impacting the mortgage market in California in recent years.
Analysis of Significant Rate Shifts
In 2024, mortgage interest rates started at just over 6% and have steadily increased.
Overall, mortgage rates have been increasing since 2022. From March 2022 until August 2023, the Fed gradually increased interest rates to combat high inflation. The increasing interest rates and high inflation caused mortgage rates to skyrocket in 2023, reaching close to 8%. As inflation rates went down at the end of 2023, mortgage rates in California also went down.
Forecasting California’s Mortgage Rates
No one can predict the mortgage market with 100% certainty. However, if you’re considering taking out a mortgage or refinancing your home loan, it’s helpful to look at market predictions and see how the market could shift.
Here’s a look at how California’s mortgage rates could change over the next 6-12 months.
Predictions
California’s mortgage rate is expected to decrease through the remainder of 2024 and into early 2025. As Fed interest rates reduce, the rate is estimated to settle closer to 5.5 – 6%. If current market conditions and economic factors stay consistent, mortgage rates will likely not increase significantly in 2024.
Let’s examine what’s driving these predictions and what might cause mortgage rates to change in the coming months.
Factors to Watch
The most significant economic indicators likely to impact California’s mortgage rates are the Fed rates, inflation rates, and home inventories.
Fed interest rates have not changed for months, but cuts are likely to come later in 2024. Fed officials have mentioned interest rate cuts are likely to happen once it’s clear inflation rates are staying low. A decrease of as much as 0.75% is possible, which would likely bring mortgage rates in the state down by a similar amount.
Inflation rates will be a crucial factor in 2024 and beyond. Although inflation is still higher in 2024 than before the rate spikes in 2022-23, it’s not expected to increase again in 2024. Factors contributing to high inflation rates are settling down. Economic growth and wages are slowly falling, with prices regulating in core sections of the economy.
Lastly, the housing market is expected to stay strong for the rest of 2024 and into 2025. Pressure on the housing market is not easing, leading the average home prices to keep increasing slowly. Home inventories are still low throughout most of California, with demand outpacing supply in densely populated metropolitan areas.
Strategies for Navigating California’s Mortgages
The housing market in California is difficult to navigate, but there are strategies you can employ to make it easier. Pay attention to timing, the loan type, and mortgage preapproval options.
Timing Your Purchase or Refinance
If you can afford to wait for an advantageous time to buy or refinance, you can choose to enter the market when rates are better.
Housing markets in California fluctuate throughout the year. Certain times of year will consistently have lower prices. Although mortgage rates will also fluctuate throughout the year, they’re not always predictable as they’re based on inputs different from home prices.
Because many parts of California have low housing inventory, waiting may not help with home prices. However, you may get a lower mortgage interest rate if you wait for inflation to reduce or the Fed to cut interest rates.
Waiting for the market can be risky. Prices and mortgage rates don’t always follow a predictable pattern. Even if predictions show the market could move in your favor, you can’t count on everything happening exactly as predicted.
If you’re comfortable with your current monthly payment or what you could have if you bought a home right now, it may be a better idea not to wait. However, if you’re waiting to refinance on better terms, you still want to wait until you can effectively get a rate at least 1% lower than you already pay.
Considering Different Loan Options
All mortgage types have different rates. The standard mortgage rate used for comparison is the 30-year fixed-rate mortgage, but many home loans may have a higher or lower rate. Depending on your situation, you need to make sure you’re looking at the right options.
Fixed rates change based on the length of the loan. 30-year mortgages tend to have higher rates, while shorter mortgages have progressively lower rates. With a shorter loan, the mortgage lender takes on less risk, leading to lower rates for the borrower.
Adjustable-rate mortgages (ARMs) differ from fixed-rate mortgages because the mortgage rates don’t change nearly as steadily. 15-year ARMs will have marginally higher rates than 10-year ARMs, but any ARMs with a term of 7 years or less will likely have a much higher rate than a 15-year ARM to compensate for the higher risk to the lender.
If you’re struggling with qualifying for a conventional mortgage, California has several loan programs to help you get a home with a monthly payment you can afford. First-time homebuyers can apply for low down payment options like California HFA or FHA loans. However, these loan types often include private mortgage insurance if the borrower has a low down payment below 20%. This can significantly impact your monthly payment.
For borrowers who need a mortgage beyond the maximum limits of payment assistance programs or conventional mortgages, jumbo loans usually offer similar rates as conventional loans while offering a larger amount. Most jumbo loans require a down payment of at least 10%.
The Importance of Pre-Qualification
You need all the advantages you can get in a competitive housing market. Mortgage pre-qualification puts you in a stronger position as a buyer for two reasons:
- Cash assurance: Mortgage pre-qualifications help you as a buyer understand how much you can afford while also showing a seller you’re putting in a legitimate offer. Although a pre-qualification doesn’t guarantee full approval, the financing will likely come through if your financial situation hasn’t changed.
- Quicker closing: Pre-qualifications are attractive for sellers who want to close quickly. When you have been pre-qualified, getting your mortgage approved during closing can be easier, expediting the process.
These advantages put you in a much better position as a buyer. Pre-qualifications usually are valid for 2-3 months at a time, so make sure you work with a lender to get pre-qualified before you start looking seriously.
Get in Touch With The Best Mortgage Lenders
Work with the best mortgage lenders to help you sort through your options and make the right choice. At Arnaiz Mortgage, we prioritize your needs and help you make the best decision for your future.
Click here to sign up for a no-obligation, hassle-free consultation with one of our expert agents today. You can also reach out anytime by calling us at (623) 806 4645 or emailing tarnaiz@arnaizmortgage.com.
It’s time to take the next step in your home ownership journey with Arnaiz Mortgage by your side.