Q. How are Interest Rates set?
Interest Rates are influenced by the buying and selling of mortgage backed securities on Wall Street. Lenders set rates daily based on the influence of the bond market. Generally, when the bond price increases, mortgage interest rates go down. Conversely, when the bond price goes down, mortgage interest rates will generally rise. The movement on the bond is influenced by many factors including the stock market, economic reports that give a read on the economy as a whole and to some extent even basic world news. All of these factors can cause the bond market to move and influence rates on a daily basis.
Q. When are Interest Rates determined?
Rates are set by all lending institutions each business day in the mid morning. This allows the banks to get a morning read on the markets and to digest any economic reports that were released that morning. Once we receive all of the rates from our many sources, we compile them into a daily rate sheet for the loan officers. Usually this occurs about 10:30 - 11:00 AM. During the day, rates can be influenced by daily factors and lenders may re-price during the day to keep up with a changing bond market. Generally speaking, once interest rates are released, they are good until 4:30 that afternoon.
Q. How can my Interest Rate change?
Many factors influence your interest rate. Credit, loan amount, loan program, down payment and property type are just some of the factors that can influence your rate. Your loan officer will take all of these factors into account when he quotes you your interest rate. Check with your loan officer for specific rate quotes for your loan program.
Q. How do I "buy" a better rate?
Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."
Even if you're unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? We can help you sort it out. It's part of our goal to find you the right loan for your means and future.
A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your annual interest rate and total interest due over the life of your loan. So, a one point loan will have a lower interest rate than a no point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, meaning there are a lot of points packages that can make a loan's terms more favorable if that's what's right for you.
There are a variety of rate and point combinations available. When you look at different loan programs, don't look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans' Annual Percentage Rate, or A.P.R. The A.P.R. is a tool used to compare different terms, offered rates, and points.
Q. What is a "Rate Lock period"? How do I make sure my Interest Rate is low?
A rate lock or a rate commitment is a lender's promise to hold a certain interest rate and a certain number of points for you for a specified period of time while your application is processed. This prevents you from going through your whole application process and at the end of it finding out the interest rate has gone up.
A rate lock period can vary in length, and longer ones usually cost more. A lender will agree to "hold" your interest rate and points for the lock-in period. A standard rate lock is 50 days depending on the loan program. On occasion, a there may be a shorter rate lock period that would allow for slightly improved pricing.
There are many ways besides opting for a shorter rate lock period to get a lower rate or lower points. A larger down payment will result in a lower interest rate than a smaller one, because you're starting out with more equity. You can also pay points to lower your rate over the life of the loan, by paying more up front. For many people, this makes sense and is a good deal.
Closing costs are fees paid by you when you close on the loan. The closing costs can vary by loan program and other circumstances. Ask your loan officer for a good faith estimate that will outline all of the closing costs you can expect.
Finally, the interest rate a lender is willing to offer you depends on your credit score and your debt-to-income ratio. If you have good credit and your income far exceeds your debt obligations, you will qualify for a lower rate.
If you closing is not scheduled to take place within the standard rate lock period, you may have the ability to extend your rate lock. There are rate lock extensions available which vary by loan program. We have extended locks available for up to 350 days. In order to extend a lock there will be an upfront fee that must be collected prior to locking in the rate. Generally, the longer a rate lock period the more expensive it will be to lock. A long term lock fee is usually non-refundable. Some long term lock options do allow for a float down if the rate has dropped when you get ready to close. If you would like to explore the cost of an extended lock, consult your loan officer for further details to see if a lock extension may be right for you.
Q. What is the difference between the Interest Rate and the A.P.R.?
You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.
The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The A.P.R. for your loan is not the actual interest rate that is used to calculate your mortgage payment. Instead, it was designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate because that is an easier thing for a consumer to compare. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.
While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.
The A.P.R. on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first placed!
So, A.P.R.s are at best inexact. The lesson is that A.P.R. can be a guide, but you need a mortgage professional to help you find the truly best loan for you.
Note: when you're browsing for loan terms, the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time. Again, the best advice is to ask your loan officer for help in deciding the best loan and rate for your needs.