What’s my rate? Why do interest rates vary? How do I get the best deal?
There are many factors that are considered when determining what your interest rate will be. In additional to the factors listed below the rates are constantly changing based on the financial markets (such as the bond and stock market). Rates can change on a daily-and even hourly-basis.
- Credit score : Lenders use credit scores to determine risk and usually range from 500-800; scores 740 or higher will have the lowest rates. But if you have a lower credit score (especially under 680) you will see that the rates are higher. The difference can be significant; two buyers with the exact same profile can have a ½%-1% variance in rate solely based on credit score.
- Loan to Value/Down Payment : The more down payment you make the less likely the loan will default. The lender risk is lower so the rates are lower. Customer #1 putting 20% down is less risk than customer #2 with a 5% down payment.
- Loan term : The shorter the term, the lower the rate. Typically a 15 year fixed rate is 1/4%-3/4% lower than a 30 year loan. If you are asking for the “lowest rate” be sure it is for the term you are expecting.
- Occupancy : If the home is owner occupied and your primary residence you will get the lowest rates. Conversely investment property is considered higher risk and typically has higher rates by ½%– ¾%.
- Loan amount and loan type : Rates will vary based on the loan amount and program type. A jumbo loan of $700,000 will have different rates than an FHA loan for $125,000.
- Property type : Generally a single family home or townhome will have a lower rate than a condominium or multi-family property (1-4 units such as a duplex/triplex/fourplex).
- Discount points : Buyers that pay “discount points” at closing receive a lower interest rate. Sometimes this makes financial sense and you will get a better long-term deal but the upfront cost must be considered.
- Lock in period : Interest rates can be locked in for 15, 30, 45, 60 days (or even longer). The shorter the lock in period the lower the rate.
- Overall economy, stock/bond market : Just as the prices of stocks change daily so do interest rates. One of the biggest factors for mortgage rates is the 10 year Treasury bond. The lower the yield on the bond the lower the mortgage rates. This data is available on many financing websites. We track the market daily and watch for trends indicating if rates are rising or falling. We will assist you with the most up-to-date information and advise you of all options so you can make an informed decision.
Should I pay “discount points” to get a lower rate?
It’s more important to negotiate the best overall deal for yourself, not just the lowest rate. For example if you say you want the lowest rate it may come with the highest cost (discount points) An interest rate of 4.5% may have no discount points whereas a lower rate of 4% can cost you thousands of dollars at closing. Discount points are paid upfront at closing to get a lower rate for the entire term of the loan; 1 discount point equates to 1% of the loan amount. Here is an example of rates/points and how the math works on a $300,000 loan fixed for 30 years:
4.5%, 0 points = $1,520.01/month
4%, 2 discount points = $1,432.25/month with $6,000 additional closing costs/points
Payment difference = $87.76/month
You’d have to pay an additional $6,000 at closing to save $87.76 per month; the time to recoup that expense is nearly 6 years. If you are not going to keep the loan that long you are better off with a slightly higher interest rate and saving the $6,000 at closing. In this case you don’t want the lowest rate, you want the best value for your money. Getting the lowest rate typically comes at the highest cost-that may not be what’s most important to you. If your real objective is to buy a home and have the least amount of money out of pocket you don’t want to spend thousands of dollars in additional closing costs to obtain the “lowest rate”. We help our clients become educated on the pros/cons and will offer you many loan options with and without discount points. The most important objective is to assist you get the best combination of rate and discount points/closing costs to meet your individual needs!