How is the interest rate determined?
Interest rates for home mortgages are determined by a number of individual factors. There are several things to remember when inquiring about the rate you will receive when getting a mortgage:
The higher your credit score, the lower your interest rate. In most cases the rates are lowest when you have a credit score of 740 or higher. Interest rates are priced in 20 point increments (i.e. 680-699, 700-719, 720-739, and 740 or higher). Most loan programs have minimum credit score requirements (600-620 in most cases).
Loan to Value
The more money you put into the transaction the lower the rate. For example, if you put 5% down the rate is likely to be slightly higher than if you put 20% down. This can vary by program and your loan officer will review all the options with you.
The specific type of property can also factor in to the interest rates that are available. A single family home or townhome will usually have a lower rate than a condominium.
Owner occupied homes (primary residence) have the lowest interest rates; investment properties have additional risk because the property is not lived in by the borrower. Investment properties have more delinquencies and foreclosures versus a primary residence.
Each loan program has different rates. We offer FHA, VA, Conventional, and Jumbo mortgages. Our loan officers will show you multiple program options so you can determine what’s best for you.
The amount of time that you are taking the loan out for can also affect the rate. Loan terms range from 10-30 years; typically the longer the term, the higher the rate. We will give you rate and payment options so you can see the difference before finalizing your decision.
If you wish to get a lower rate you may do so by paying the lender an upfront fee. This is called “buying down” the rate because at closing you will pay “points” in return for the lender giving you a lower rate over the term of the loan. Discount points will vary by program and we will give you a rate quote with several different options (with discount points and without). If you pay “1 discount point” that would equate to paying 1% of the loan amount at closing ($200,000 with 1 discount point = $2,000). Your loan officer will assist you with calculating the difference in monthly payment to see if it is worthwhile for you to pay discount points at closing.
Rates will vary depending on if you are purchasing a home, refinancing with no cash out to get a lower rate, or refinancing in order to take equity out of the home (also called “cash out refinance”). In most cases a “cash out” refinance is more expensive than a purchase or rate reduction refinance.
Rate Lock Period
The quicker the loan is closed after locking in the lower the rate. Most loans are locked in for 15-45 days, depending on when your closing is scheduled. Some closings (normally new construction) can be longer than 45 days from loan application, and we offer extended rate lock in periods (may incur an upfront fee depending on how long the rate is locked in).
Stock and Bond Market
Interest rates are generally based on the US Treasury bond market (most notably the 10 year Treasury bond). The lower the bond yield, the lower the interest rates. The bond market is always changing just like the stock market, so although our interest rates usually change once a day it is possible that rates can change during the day if there are large movements in the market. For example, if you get a quote to buy Home Depot stock at 10 am it’s possible that the price to buy the stock is different at 3 pm. The bond market affecting mortgage interest rates are the same way, they are always subject to change. If you wish to lock in your rate please call us and we will give you an up-to-the minute quote, and if you choose to lock in we will send you a written confirmation of the rates, terms, and costs for the program you choose.
Please contact us if you have questions or concerns about interest rates, terms, or locking in. Although there is no way to accurately track the daily interest rates that apply to your individual loan financing you can get a general idea of the daily market and the direction of rates. Websites such as CNBC and Bloomberg have the 10 year Treasury Bond posted all day.