Interest rates do not change, rather it is the price that lenders pay for their money that will change and dictate the retail cost of your money. For example, if we were a bakery that sold bread and the cost of the flour that we used to make it went up, so would the price of our bread.
Our competitors bread would go up as well due to the market cost of flour. They could have a small stockpile of flour that will allow them to keep their prices steady for a while, but eventually their prices will reflect the cost of flour. So goes the banking world.
So, what does all this mean? It is a long winded way of saying that money has a wholesale and retail price. As a consumer you should know the difference between the two when shopping for your next mortgage. If you take a look at our sample rate sheet, you can see the prices that lenders pay for specific money over time. This rate sheet is an example of 30 year fixed money.
In the mortgage world, 100.00 is par. Meaning that is what the money cost. Any number below 100.00 like 99.00 represents a cost to the lender / borrower, transversely 101.00 represents a profit. On the example sheet, 6% represent a par rate. Meaning there is very little gain and no loss for the lender that issues this rate. This would be the wholesale rate.
If you are asking the lender for their wholesale rate, you can expect their profit margin to be added into the fees via an origination or discount point. Keep in mind when shopping for interest rates that there are over 250 programs out there. Each program has it's own cost assigned to it by the investors and risk level it represents.
If you are willing to risk a higher rate in the future you can obtain a lower rate with an Adjustable Rate Mortgage. When interest rates adjust the potential for profit is greater for the investor, therefore as an enticement the initial rate is lower. If we use the 30 year fixed mortgage as the watermark we can begin to predict where interest rates for the other programs should fall in respect to this rate.
Anything that is over and above a thirty year fixed will cost more. If we are asking investors to give A 40 year fixed, interest only thirty year fixed, low documentation 30 year fixed, you can expect to pay a premium (higher rate). If you are asking the investor to give you less than a 30 year fixed mortgage, i.e. 5 year fixed (arm), 15 year fixed or an adjustable rate, you can expect to pay a discount (lower rate).
When choosing your interest rate it is helpful to have a good estimate to how long you plan to be in the mortgage. Most people are in their home for 10 years but only in their mortgage for less than four years. If you plan to stay in
your mortgage in excess of 4 years it is a good idea to look at getting the lowest rate on the market and yield on fees. This usually means paying more in closing cost, or even discount points. I you plan to be in the mortgage less than 3 years it may make sense to pay a slightly higher rate in lieu of closing cost. Look into taking a little higher rate in lieu of higher fees if:
- You have a pattern of refinancing
- You have "untapped" equity you may need to "tap"
- You expect to move in the next few years.
A lower rate will win exponentially over time, where lower fees will win over the short term. The problem is tha most people can not accurately judge how long they will be in their mortgage. If you use our "should I pay points calculator" you can get an idea how long you should stay in the home to recoup your closing cost. A good loan officer and honest lender can go a long way in helping you make the best decision for your mortgage. |
Questions?
LendFast.com - Learn About Interest Rates
