The question I get asked the most is “what is your interest rate”? My response frequently is “it depends on a lot of different factors”! So how does it get figured out? Here are some of the pieces to the puzzle!
One of the biggest factors in your interest rate is your credit score. The higher your score, the better the interest rate. For every 20 point drop in your score, there is a extra cost in your rate – it’s not much, but the lower the score, the bigger the charge!! There could be a 1% cost if your score drops from 700 to 660 – that can definitely affect your interest rate!
Another factor is the type of mortgage you are getting – are you buying a home or refinancing? Is it a cash out refinance- all those play into the rates. How much are you putting down? If you are putting less than 20% down on a conventional mortgage, you will need mortgage insurance. It may be rolled into the interest rate (so a higher rate) or you may pay it separately. If you are putting more than 25% down, it can definitely help lower your interest rate.
What type of property are you buying? Is it a single family home or a condo? There is a hit to the interest rate for condos. Are you buying a duplex or a 3 or 4 unit home? That can cost more also.
The other big factor is the economy. Changes in the stock market, the bond market and overall economy will affect interest rates. If there are economic concerns globally, investors may take money out of the stock market and put it in treasury bonds – that can help lower interest rates. If there is economic news showing the economy is growing or employment is improving (this is happening a lot lately), we can see interest rates get worse.
You have an option to pay to lower your interest rate – talk to your loan officer and see what makes sense. Some loan officers charge an origination fee – some don’t – you need to know what you are paying. Also ask if you need to pay the origination fee – your rate will be higher if you don’t but the fee is typically 1% of your mortgage amount. That can be a large part of your closing costs. Figure out how long you think you might keep this home – or just this mortgage. Then figure out what it costs you to pay down the rate and how much you are saving. Sometimes it may take 5-7 years to pay the difference in the cost of origination fee (or points). Your loan officer can answer those questions. I usually will give my clients a couple different rates, the cost for those rates and how long it takes to pay back the fees. If you know you will not be in the home for more than 5- 7 years, it may not make sense to pay anything to lower your interest rate. If you think you will be in the house for the rest of your life, it will make sense to pay to lower your rates!
Interest rates can change daily – sometimes more than once a day. If you are in the market to buy a home, talk to your lender and see where the rates are. Ask what they have been doing -rates have been rising over the past year, but did drop from the end of 2018. We are actually seeing more steady rates than we expected in 2019. The initial thought was that rates would be over 5% this year- now we are looking at lower rates for most at this time. All this is subject to change! If you are buying a home or refinancing, make sure you stay in touch with your loan officer so you know what is going on with interest rates!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
