“If something sounds too good to be true, it probably is.” – Richard Carlson
These are words to live by, and in this case, it may not be any different! Look, as consumers, we do our best to determine if we are getting a fair deal. We check with our friends and family, research online, and in the end we make the best decision we can – often taking the advice of industry professionals.
Because rates change daily, sometimes more often, our time to compare is limited. We are bound by time, which adds stress, but who do we trust? We each have to make our own decision on that.
During this 2020 COVID-19 Pandemic, we’re seeing historically low rates, the lowest of all time in fact. Regardless of what market we’re in, there are ALWAYS lenders screaming from the rooftop (or posting online) that they have the lowest rates, so I caution you: buyer beware!
You may ask: “what is your rate” and you hear whatever it is that they reply with. Unfortunately, there is a lot more that goes into a rate than a simple number. So let’s take a peek behind the mortgage rate curtain & discuss some of the things that may affect your home loan interest rate.
Many lenders including direct lenders (mortgage banks) and depository banks (such as Chase) have costs and overhead, including advertising, marketing, management, etc.. These costs get passed down directly to you as the consumer. Independent Mortgage Brokers, conversely, have very little overhead (which is why you haven’t heard of them), thus they can pass more pure rates directly to consumers.
The better your credit scores (720+ typically), the better your interest rate, and the lower your scores, the higher your interest rate. This is one of many “loan level price adjustments” or LLPA’s.
Loan to Value
Another LLPA is loan-to-value, or the difference between your home’s value and the balance of the loan you’re financing. The more equity in the home, the better interest rates.
Type of Loan
The best rates are usually seen on government loans, such as FHA & VA, which come with other types of add-ons, such as mortgage insurance or in VA’s case, a funding fee. Conventional loans also have good rates, with the lower end of the scale being available to those with lower LLPA’s. Higher balance loans and jumbo loans can have a bit higher rates.
Interest Rate Type
Fixed rate loans will have a bit of a higher rate than an ARM, but while the ARM is lower at the beginning, it will eventually be converted to a fixed term loan, oftentimes at a higher rate.
A “detached” single family home will typically have a lower rate than a condo, primarily because the condo has a shared wall with another home, and is in a community giving it more of an opportunity for problems.
If you live in the home you’re financing, you’ll get better pricing than if it’s an investment home, and can benefit from lower equity needed in the home.
A 30 year term on a loan will have a bit higher rates than a 15 or a 20 year term. The shorter terms are lower because the lender will be financially extended for a lesser time.
Every rate has a cost or a credit, so based on the mortgage company’s overhead, cost & appetite, your rate will have either a higher or a lower cost associated with it. Mortgage brokers typically have the best pricing, which I’ll share more on in a bit.
Lower economic growth levels and consumer spending will drive rates higher, just as higher growth levels and consumer spending will drive them lower.
Devalues the dollar & tends to lead to higher mortgage rates
There are a few things driven by the Federal Government that affect interest rates. I’ll just touch on these, as a long drawn out explanation would likely bore you, and take us down several rabbit holes. Despite popular belief, The Fed Fund Rate doesn’t directly affect mortgage rates. It affects the rates banks lend and borrow with other banks. Consumer sentiment does affect rates for a brief time when the Fed makes a move though. Big investor trading of stocks or bonds will affect rates based on their appetite for one or the other. This is also a long conversation for another day.
So what’s best for you? Well ultimately you have to make that decision, but here’s my advice: go get a quote from your favorite depository bank or mortgage bank, and then bring the loan estimate to me. I’ll either beat what you’ve been offered, or I’ll tell you that you have the best deal. Either way you win!