My rates are typically lower than average by .25% or more
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.
Closing costs and lower rates-what to know
Why isn't the lowest interest rate the most advantageous option? Initially, lower rates typically 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 comes at no cost but results in a $50 higher monthly payment, it could take up to a hundred months to reach the break-even point! Given that the average loan duration is 60 months or less, this scenario doesn't seem logical.
Why do lenders promote extremely low rates along with numerous points and fees? They do so because they understand that the majority of consumers only consider the interest rate and neglect to calculate the overall costs. Regrettably, this marketing tactic proves to be highly effective on many individuals.
What is the Annual Percentage Rate (APR)?
Lenders do not only charge interest on mortgages. The APR considers additional costs and fees related to borrowing. This annual percentage rate reflects the total cost of your
mortgage, including the interest rate and various fees associated with purchasing or refinancing a home. These fees may encompass prepaid interest, discount points, origination fees, mortgage insurance or PMI, and other closing costs such as certain title company fees. The APR provides a comprehensive assessment of the annual net cost of your loan and can be rounded to the nearest one-eighth of a percentage point.
Mortgage Interest Rate vs APR
Upon applying for 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?
Typically, the higher the lender fees you pay, the lower the APR will be. Having a low APR may seem appealing, but did it result in the most favorable financial outcome? Not everyone has the means to afford a lower rate. Consider the duration of your stay in the property. It is not uncommon for individuals to incur extra closing expenses in order to secure a slightly reduced interest rate. However, upon closer examination, it could take up to 10 to 15 years to offset the expenses associated with that lower rate through the reduced monthly payments.
Limitations of the APR
Two identical loans may have different APRs due to variations in the fees used by different lenders to calculate the APR. Lenders have the discretion to decide which fees and costs are included in the APR calculation, so it is important to carefully compare loan offers. For identical loans, the prepaid interest – and consequently the calculated APR – may differ depending on the timing of your purchase (or refinance) transaction. Closing later in the month will reduce the prepaid interest. The calculation of APRs on ARMs depends on whether the initial rate is fully indexed, discounted, or premium. It is not uncommon to see the APR lower than the mortgage rate for ARMs. When calculating the APR on ARMs after the fixed rate period, lenders must use the rate that would apply if the loan were to adjust at the time of offer, assuming that rate remains constant for the subsequent 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 does not automatically indicate that one of the two loan offers is superior. It is important to also take into account the duration for which you intend to maintain that particular loan.
APR calculations are based on the assumption that you will hold the mortgage for the entire loan term. If this is not the case, upfront costs may escalate the actual cost of your loan and raise the APR as a result of a shorter loan duration.