How Do I Know If I’m Getting The Best Interest Rate?
Unfortunately, many advertisers will tease a low interest rate in a marketing campaign for the purpose of creating interest in a specific loan program which may only fit a unique type of qualified borrower.
However, by promoting a lower note rate, with a higher APR, lenders are able to control the flow of the inbound phone call or Internet lead.
Understanding how interest rates work will certainly help relieve a lot of unnecessary anxiety about the home financing process.
While loan programs, credit scores and outside economic factors tend to control mortgage rates, borrowers do have the option of paying more up-front at the time of closing in the form of a discount point or loan origination fee in order to secure a lower interest rate.
Alternatively, borrowers currently have the option of taking a slightly higher rate in exchange for lower closing costs. This particular rate / closing cost scenario is sometimes referred to as a “No Closing Cost Loan” option, or something similar.
Mortgage Rate Basics:
How Are Mortgage Rates Determined?
Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.
The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors.
When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.
Market Factors That Influence Mortgage Rates
Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.
While there are several several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.
Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile living and breathing animal.
Lenders set their rates every day based on the market activities of Mortgage Bonds, also know as Mortgage Backed Securities (MBS).
On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.
Inflation, The Federal Reserve, Unemployment, Gross Domestic Product and Geopolitics are a few of the items you can pay attention to if you’re trying to track rates for 30 day lock.
Questions Your Lender Should Be Able To Answer About Mortgage Rates
Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.
Since mortgage rates can change several times a day, it’s more important to pre-qualify your lender about his/her competency level with regards to mortgage rates.
If your lender doesn’t know what to look for or how to answer some basic questions, there is a good chance you may not ever see that initial interest rate you were quoted.
What’s The Difference Between Note Rate and APR?
Low rates with a high APR may or may not be the best deal.
Comparing apples to apples is the best way to determine which loan closing cost and rate scenario makes sense for your short and long-term financial goals.
The federal government requires lenders to quote APR because loans frequently are offered on different terms. To extend the inevitable fruit analogy, differing loan terms from different lenders can make it hard to figure out which offer is a sour persimmon and which is a real peach. APR helps you identify the peaches.
For example, you might get the following two quotes for $150,000 mortgages, each for a 30-year term:
- Lender A offers 6.5 percent with the borrower paying no discount points and $5,000 in fees;
- Lender B offers 6.25 percent with the borrower paying 1 discount point ($1,500) and $5,500 in fees, for a total of $7,000 in points and fees.
Lender B offers a lower interest rate (or “nominal rate”), but for $2,000 more in points and fees.
Which is a better deal? APR gives you a general idea.
Lender A’s offer has an APR of 6.83 percent, while Lender B’s offer has an APR of 6.71 percent. Since Lender B’s APR is lower, that loan is a better deal in the long run.
But that’s in the long run.
Consider the term
In the short run, Lender A’s offer might be better. A look at the examples above tells why.
Lender B’s offer carries a lower APR, but you, the borrower, have to come up with $2,000 more in cash. What if you don’t have the money, or you have it, but need it to buy appliances? In those cases, you might prefer the first loan, despite its higher percentage rate and APR.
Or what if you think you might move within a few years? Loan A costs $948.10 a month in principal and interest — $24.52 a month more than Loan B. So with Loan B, you pay $2,000 up front to save a little less than $25 a month. At that rate, it takes 82 months — more than 6.5 years — to recoup the $2,000. If you sell the house in less than 82 months, Loan A costs less.
On the other hand, if you plan to remain in the house for the life of the loan, follow Newton’s advice: “Don’t even look at the nominal rate,” he says. “What you really want to know is what the net effective cost of funds is, and that’s APR.”
APR takes into account some costs of getting the loan, including points, most loan fees and mortgage insurance. It does not take into account certain charges, including nonrefundable application fees, late payment charges, title insurance premiums, and fees for title examination, property appraisals and document preparation.
The federal Truth in Lending Act requires the lender to disclose both the nominal rate and the APR. The nominal rate can’t be stated more conspicuously than the APR.
The APR doesn’t have to be perfectly accurate. The lender can round up or down to the nearest one-eighth of a percentage point.
How Do Mortgage Rates Move When The Fed Lowers Rates?
The traditional news media generally announces mortgage rate movement a few days too late, or when rates are moving in the opposite direction of where we need them to go.
One of the big misconceptions most people have about mortgage rates is that the Fed, and / or Federal Government control what mortgage rates look like every day.