What's your interest rate?
This is one of the first questions we are asked. The truth is, nobody can quote you an accurate interest rate without having some basic information about you. Anyone that does is just guessing.
Interest rates are simply based on the risk to the lenders in providing you the loan.
Here are the 3 main factors that are used to determine how much risk your loan represents to the lender: Why?
1. LTV (Loan To Value): How much equity you have in your property.2. DTI (Debt to Income Ratio): How much you can afford to pay monthly.3. FICO: Your credit score, based on your history of paying debts.In addition to these risk factors, the type and amount the of loan
and a few other factors will also affect the interest rate.
Your interest rate can also be affected (lower) if you choose to pay "points" up front.
Note: Rates published by mortgage companies are usually assuming that you are in a perfect risk scenario.
Call me now for an accurate interest rate quote!
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Be cautious when shopping around...
Most lenders will quote you an interest rate right over the phone as soon as you call. The problem is that they can not possibly know what rate they can get for you if they have not looked at your credit, income and equity. It is a sad part of the mortgage business that if you shop for the best interest rate you will find some loan officer that will say whatever it takes to get your business, then you find out, when it's too late, that you are charged additional fees in order to get the rate you were promised.
How we do business...
We do things the right way by getting enough information from you up front before we quote you a loan program. We take the time to understand your financial profile and goals. After listening to what you want we can design a specific loan program that meets your needs. Then we put it in writing to you.
Q: How do LTV, DTI & FICO affect my rate?
Answer:
The lower the LTV the better (because you have more at stake and will be less likely to default)
The lower the DTI the better (because you will have an easier time making the payments)
The higher the FICO the better (because you have demonstrated your good payment history).
Q: Why does a longer loan term have a higher interest rate?
For example a 30 year fixed has a slightly higher rate than a 15 year fixed rate, and both have higher rates than an ARM (Adjustable Rate Mortgage).
Answer: A longer loan term represents a higher risk to the lender for two reasons:
1. More time for the chance of default. 2. The lender is locked into making less (income) for his loan than they would if rates were to go up.Q: How does the amount of the loan come into play?
Answer: Generally the higher the loan amount the lower the interest rate.
Q: What other factors can add to the interest rate?
Answer: Interest Only loans, Non-owner occupied (Investment properties), cash out refinances (depending on the LTV).
Q: What are Points?
Answer: Points expressed as a percentage of the loan (ie: 1 point = 1%, 2 points = 2%, etc) are how the mortgage industry refers to an origination fee or a discount fee. A discount fee is tax deductible but an origination fee is not. Points are (at the option of the borrower) paid up front to the lender in order to get a lower interest rate. This will make more sense to a borrower that is planning to keep the loan for a longer period of time, and therefore makes less sense for a shorter term borrower. A break even analysis can be made to help determine your best decision.
Interest rates: How they move:
The U.S. economy, interest rates, and the housing market are frequent topics on the nightly news. Viewers are told about leading economic indicators, how the stock market has performed, and whether the Federal Reserve is planning on changing interest rates. What isn't explained is how these items are interrelated and how they may impact which home loan is best for you.
The Federal Reserve attempts to keep the U.S. economy healthy through its use of monetary policy. As fears of inflation increase, the Fed will raise certain short-term interest rates such as the federal funds rate, which is the interest rate banks pay each other for overnight loans. Such an increase causes a ripple effect, with banks raising their prime lending rate. This, in turn, causes an increase in Adjustable Rate Mortgage (ARM) rates and the indices they're tied to, such as the 12-Month Treasury Average (MTA), the 11th District Cost of Funds Index (COFI), and the 1-Month London Inter Bank Offering Rates (LIBOR).
Under normal circumstances, long-term interest rates would also increase even though they are determined by market trading of bonds and mortgage-backed securities rather than monetary policy. However, in certain instances, the market responds in an unexpected manner.
Long-term interest rates are driven by a desire to place money in a steady vehicle that will provide a decent rate of return. When the stock market is underperforming, many corporate and individual investors will sell stocks, and invest their money in bonds. However, when there is an increased demand for bonds, the law of supply and demand comes into play. As the demand for bonds increases, the need to attract investors decreases, so the yield offered on those bonds declines.
Typically, the longer the holding period of a bond, the higher the yield it will offer. This makes sense because the longer an investor's money is tied up in that investment, the more they should receive for it. Now think about this in terms of your mortgage. When you have a 30 year term your rate will be higher than a 15 year term, because you are borrowing money from an investor over a longer period of time.
When the Federal Reserve pursues an aggressive policy and raises short-term interest rates repeatedly over an extended period, and the bond and mortgage-backed securities markets are booming so their yields are lower, an unusual situation arises. Short-term interest rates are high while long-term interest rates remain lower. This leads to a shift in the usual yield-versus-term paradigm, known as an inverted yield curve.
So what does this mean to a consumer who is trying to determine what type of mortgage would be best under these economic conditions? It means that in an unusual situation such as this, the cost of an Adjustable Rate Mortgage is not significantly lower than that of a 15- or 30-year fixed mortgage. Rather than taking out (or keeping) an ARM, which is variable and will increase if short-term interest rates keep rising, it may be better to pursue a 15-year or 30-year fixed rate mortgage.
In summary: Short term mortgage interest rates are usually lower than long term mortgage rates. However, when the Federal Reserve (in order to cool off the economy) has been aggressively raising the discount rate, it could cause the spread (difference) between short and long term rates to narrow or even invert. This is called an inverted yield curve and could signal that a long term mortgage rate is better than a short term rate.
Another way to view the direction mortgage rates might possibly move is by watching what the 10 year treasury is doing. Please keep in mind though that there is no set formula for predicting where interest rates are headed and many things effect rates in general. However, mortgage interest rates do seem to follow the 10 year treasury. When the 10 year treasury yield moves .5 or more in either direction it could cause lenders to re-price their mortgage rate sheets.
One more note about bonds. When we talk about bond prices we are usually referring to the cost of buying bonds on the open bond market. It is very important to note that bond yields and bond prices move inversely. That is to say that when bond yields go up, bond prices go down and vice versa. When bond prices go up, bond yields go down, therefore; rising bond prices could mean lower mortgage rates.
In retrospect, talk to anyone that bought a home in 1982 during the Jimmy Carter high inflationary years and you will hear of mortgage interest rates in the 12-14% range! Since 1990 rates have gradually come down to the more reasonable rates of today. Not quite as low as the rates during the 50s and 60s but definitely low enough to make home ownership affordable.
Because economic conditions are constantly changing, it's important to consult with a mortgage professional that is knowledgeable about the markets and how they impact the different loan programs available. This will ensure that homeowners obtain the best mortgage available despite market fluctuations.
We will help you get the best loan at the lowest cost, with quick & easy closings.
We link to real estate mortgage loan consultants, licensed in the state of Illinois, specializing in low cost home loans, providing helpful information and honest answers to your mortgage questions.
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