Usually, my rates are .25% or more below the average
How Rates move
Traditional and governmental lenders determine their rates by referencing the pricing of Mortgage-Backed Securities (MBS) that are actively traded in the bond market.
Throughout the day, rates and loan fees (referred to as mortgage pricing) fluctuate due to various economic or political events.
When MBS pricing increases, it typically results in lower mortgage rates or pricing, which is beneficial. Monitoring these securities in real-time is essential to help secure the best loan pricing for you. For further details on the rate market, feel free to reach out to me. I am one of the few mortgage professionals with access to live trading screens throughout market hours.
Closing costs and lower rates-what to know
Why isn't the lowest interest rate the most favorable option? Initially, lower rates often entail higher lender fees (points). It's important to consider a break-even point when factoring in closing costs, points, and fees. For instance, if obtaining a specific rate costs $5k while a higher rate has no upfront costs but results in a $50 higher monthly payment, it could take a hundred months to reach the break-even point! Given that the average loan term is 60 months or less, this approach doesn't seem logical.
What is the reason behind lenders promoting extremely low rates along with numerous points and fees? It's because they are aware that the majority of consumers only focus on the interest rate and do not calculate the overall cost. Regrettably, this advertising tactic proves to be highly effective on many individuals.
What is the Annual Percentage Rate (APR)?
Lenders charge more than just the interest rate on the mortgage. The APR also factors in 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 or refinancing a home. These can include prepaid interest, discount points, origination fees, mortgage insurance or PMI, and other closing costs liks some title company fees. 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.
Mortgage Interest Rate vs APR
When you request a mortgage loan, federal law mandates that the lender must provide you with information on both the interest rate and the annual percentage rate (APR). This allows borrowers to compare loan offers from different lenders. Nevertheless, your monthly payment is determined by the loan's interest rate.
How about the lowest APR?
Generally the more lender fees 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 on the cost of that lower rate- based on that lower monthly payment.
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.
Having a lower APR doesn't always indicate that one of the two loan offers is better. It's important to also take into account the duration for which you intend to hold that 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.