No matter what someone is shopping for, a car, a mortgage, a house, they always seems to search for the “lowest price” or “lowest rate”. Unfortunately, finding the “lowest” of something does not necessarily mean that you are finding the “best” that there is available. In the world of mortgages, the absolute lowest rate often times comes in the form of a Variable Rate Mortgage, additional fees, costs and points. Do not be fooled by the advertisements on the internet or television commercials. The correct way to shop for anything is to ask questions, get educated and find the people who will deliver what they promise.
In reality, these days, the variation in lenders’ products and rates is much more limited than pre-crash, due to now government regulation and things like the SAFE act that was passed. When it comes to a 30-year fixed, the rate of pricing is extremely tight, and there truly is not much wiggle room. It is going to boil down on service.
If you are focused on interest rates because you are concerned about your monthly payment for mortgage, understand that your monthly mortgage payment is also based on the following;
- Interest rate
- Mortgage Insurance (for loans with less than 20% down)
Also things to consider with lenders – what are you trying to accomplish? Are you more concerned about your monthly payment or how much you have to pay out of pocket at closing? This will also determine what rate is best for you.
How are interest rates determined?
Your mortgage’s interest rate is set by market forces beyond the lender’s control. Mortgage interest rates are determined mostly on the secondary market, where mortgages are bought and sold.
Fannie Mae and Freddie Mac are huge financial institutions that buy mortgages and bundle them into securities that behave like bonds. Then they sell the mortgage-backed securities to investors. Investors in the secondary market who collectively determine the interest rate of your mortgage loan. Your lender offers you an interest rate that investors on the secondary market are willing to buy.
Fannie and Freddie exist to keep money flowing through the mortgage finance system. When you get a mortgage, the lender sells the loan on the secondary market. By selling the mortgage, the lender gets its money back quickly so it can lend the money again, to another mortgage borrower.
Mortgage rates fall when:
US stocks tank
Foreign markets tumble
Inflation is expected to slow down
Mortgage rates tend to rise when:
US stocks rise
Foreign markets rise
Jobs are easy to get
Inflation is expected to speed up
How is YOUR mortgage interest rate determined?
1. Credit scores
Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores.
2. Home location
Many lenders offer slightly different interest rates depending on what state and county you live in. Check with your local lenders
3. Home price and loan amount
Homebuyers can pay higher interest rates on loans that are particularly small or large. The amount you’ll need to borrow for your mortgage loan is the home price minus your down payment. Depending on your circumstances or mortgage loan type, your closing costs and mortgage insurance may be partially included in the amount of your mortgage loan, and/or have to be paid partially at closing.
4. Down payment
In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. If you can comfortably put 20 percent or more down, you’ll usually get a lower interest rate.
If you cannot make a down payment of 20 percent or more, lenders will add in mortgage insurance, which protects the lender in the event a borrower stops paying their loan, but allows borrowers the opportunity to still purchase a home even if they do not have 20% down. The mortgage insurance adds to the overall cost of your monthly mortgage loan payment. That’s why it’s important to look at your total cost to borrow, rather than just the interest rate.
5. Loan term
The term, or duration, of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments. A lot depends on the specifics-exactly how much lower the amount you’ll pay in interest and how much higher the monthly payments could be depends on the length of the loans you’re looking at as well as the interest rate.
6. Interest rate type
Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market.
Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly later on.
7. Loan type
There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Lenders decide which products to offer, and loan types have different eligibility requirements. Rates can be significantly different depending on what loan type you choose.
8. Points and rates
Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.
Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to put towards your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate.
There are three main choices you can make about points and lender credits:
- You can decide you don’t want to pay or receive points at all.
- You can pay points at closing to receive a lower interest rate.
- You can choose to have lender credits and use them to cover some of your closing costs but pay a higher rate. More info: https://www.consumerfinance.gov
Is the Mortgage Loan with the lowest interest rate always the best loan?
It’s not just one of these factors-it’s the combination-that together determine your interest rate. Everyone’s situation is different.
Take care online: There are plenty of attractive deals online, but first make sure you’re dealing with a reliable broker or lender.
Get recommendations: Ask friends and family members for suggestions, especially if they’ve recently obtained a loan.
Extra care during peak season: Unscrupulous lenders and brokers are more apt to quote you bogus rates or slip in extra costs during peak homebuying season, in hopes you won’t notice. Rates between lenders should not be very different from the other, if one is extremely lower than the other, it’s probably not the true rate, and once it goes to locking the rate after you have started the paperwork process, you may be quite surprised by a much higher rate… sometimes it can be the market…but again…before an application a lender can “quote” you any rate…and that quote especially before they actually run your credit report will not be completely accurate. In addition, also check the lender fees. All lenders will charge some type of fee – processor, credit report, underwriting, administration – each lender has different names for their fees.
Closing Costs: https://ddesousa.com/closing-costs-what-are-they/
Credit & Buying a Home: https://ddesousa.com/credit-and-buying-a-home/
First Time Home Buyers: How to Purchase Part 1: https://ddesousa.com/part-1-first-time-home-buyers-florida/
First Time Home Buyers: How to Purchase Part 2: https://ddesousa.com/part-2-first-time-home-buyers/
First Time Home Buyers: Down Payment Assistance: https://ddesousa.com/how-can-i-buy-a-home-part-3-assistance-programs-palm-coast-fl/
Loan Programs More: https://ddesousa.com/how-can-i-buy-a-home-part-4-loan-programs-palm-coast-fl
More on Interest Rates: https://ddesousa.com/the-down-low-on-interest-rates/
Disclaimer: Blog is written solely by Danielle Desousa, Mortgage Lender NMLS #1649268. All information provided is deemed reliable, but is not guaranteed and should be independently verified.