Mortgage Rates - what to know
How Rates move
Conventional and Government lenders set their rates based on the pricing of Mortgage-Backed Securities (called MBS) which are traded in real time in the bond market. This means rates and loan fees (called mortgage pricing)move throughout the day, affected by a variety of economic or political events. When MBS pricing goes up--good -- mortgage rates or pricing generally goes down- bad. Tracking these securities real-time is critical to assist in obtaining you the best loan pricing. For more information about the rate
market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
IT's not about the best rate. It is about the best MATH.
So why isn't the lowest interest rate the best deal? First- lower rates come with more points and fees. There's a break even point to contend with when paying closing costs, points and fees. If it costs you $5k for a certain rate and the
higher rate costs zero but has a monthly payment $50 higher --it can take a hundred months to break even! And with the average loan lasting 72 months or less--
that doesn't make sense.
So why do lenders advertise really low rates with all of those points and fees?Because they know most consumers look at the interest rate only,
and don't do the math. Unfortunately that advertising strategy works really well.
How about the lowest APR?
Generally, the lower the actual interest, or the more discount points you pay, the lower the APR. A low APR sounds and looks good. But was it the best math? Do you have the money to buy a lower rate? Many people don't. How long are you going to be in the home? I commonly see people paying additional closing costs to get a slightly lower interest rate - but if you do the math, it might take as much as 10 to 15 years to break even--- based on that lower monthly payment. Sounds like bad math to me.
Mortgage Interest Rate vs APR
When you apply for a mortgage loan, the lender is required by federal law to disclose to you both the interest rate and the annual percentage rate (APR). This enables borrowers to know true cost and perform apples to apples comparison of loan offers by competing lenders. Your monthly payment, however, is based on the interest rate of the loan.
What is the Annual Percentage Rate (APR)?
Lenders charge more than just the interest rate on the mortgage. The APR also factors in one-time costs and fees associated with borrowing. The APR, which is expressed as a yearly percentage rate, represents the true cost of your mortgage loan after taking into account the mortgage interest rate plus the fees and costs that you have to pay when buying a home. These can include prepaid interest, discount points, origination fees, PMI premiums and other closing costs. The APR is a more complete measure that reflects the net effective cost of your loan on a yearly basis. It can be rounded up or down to the nearest one-eighth of a percentage point by the lender.
Mortgage Rate Explained
Mortgage interest rate is the cost of borrowing money. It determines your periodic (monthly) payment amount towards your mortgage. The mortgage interest rate typically remains fixed for the entire mortgage term or if an ARM may vary with a benchmark interest rate at certain pre-defined periods. At a macro level, the interest rate varies depending on various global economic factors such as inflation, unemployment rate and economic growth. At a micro level, it varies based on your credit score, down payment, loan type (fixed or variable) and loan tenure.For a fully amortizing loan, each mortgage payment includes the principal and the interest components. It is important to understand that you pay interest only on the unpaid portion of the mortgage. For this reason, mortgage payments start off with a higher interest component initially and it decreases gradually. To put it another way, each successive payment goes to reduce more of the principal loan amount.
For a fully amortizing loan, each mortgage payment includes the principal and the interest components. It is important to understand that you pay interest only on the unpaid portion of the mortgage. For this reason, mortgage payments start off with a higher interest component initially and it decreases gradually. To put it another way, each successive payment goes to reduce more of the principal loan amount.
Limitations of the APR
Two identical loans may have different APRs because the fees one lender uses to calculate the APR may differ from what another lender uses. Lenders have some discretion to choose whether or not certain fees and costs are part of the APR calculation, so you may have to look more closely when comparing loan offers.
For identical loans, your prepaid interest – and hence the calculated APR – may vary depending on when you close your purchase (or refinance) transaction. Closing later in the month will decrease the prepaid interest.
Calculating APRs on ARMs differs depending upon whether your initial rate is fully indexed or if it is discounted or premium. Don’t be surprised if you see the APR lower than the mortgage rate for ARMs. To calculate the APR on ARMs after the fixed rate period, lenders are required to use the rate that would be produced if the loan were to adjust at the time it is offered, and to assume that rate would stay constant for all the years after the initial period.
The APR should only be used to compare similar loan products with same mortgage amount and tenure. For example, you shouldn’t compare the APR of a 30-year fixed rate mortgage to that of 5/1 ARM.
A lower APR does not necessarily mean it’s better of the two loan offers. You should also consider how long you plan to remain in the loan.
APR calculations always assume you will be keeping the mortgage for the entire loan term. If not the case, the upfront costs can increase the true cost of your loan and increase the APR due to a shorter loan life.