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Less is more
If you're
new to investing or real estate and
don't know the first thing about
interest rates, here's a good tip: the
higher the interest rate, the more
expensive it's going to be. High
interest rates mean you will have to pay
back more on the money you borrow.
Another good rule of thumb is that
affordability increases if you use an
adjustable rate mortgage (it's easier to
qualify this way). Of course, there will
be a wide range of prices that you can
choose from, depending on what kind of
financing you choose..
Not
even the Fed knows for sure
The Fed
holds a considerable amount of power,
but they can't control everything.
Mortgage interest rates are affected by
many unpredictable political, economic
and social events. So there is no
guarantee what direction interest rates
will go, despite the forecasts of the
experts. Therefore, make your financial
decision based on where things are today
including your budget, your needs and
your future plans.
Locking in rates assures your lowest
interest
If you do
decide you want to lock in at a certain
interest rate, you will need to complete
a loan application and send it to your
lender as soon as possible. This must be
done so that your commitment doesn't run
out before your loan is approved. Follow
up and be se sure that the lender is
receiving all of the necessary
documentation. Get a property appraisal,
which usually costs about $300, through
your loan agent as soon as possible.
Don't obsess and miss a good real estate
deal
Although
rising interest rates can create more
problems for home buyers, waiting and
hoping for low rates is not necessarily
a smart move. You may end up paying a
higher price. Also, refinancing is
always an option in the event that
interest rates come down.
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Mortgage Rates and Pricing
"What
is your rate today?" prospective
borrowers ask when they call up a
mortgage lender shopping for
rates. Well, there isn't just one
rate. There is a choice of rates
and the rates are very similar
from one lender to the next -
perhaps identical.
A Loan
Officer's Rate Sheet
Every morning a loan officer gets
a rate sheet - or a number of
them. Mortgage bankers get the
rate sheet from their company.
Mortgage brokers get rate sheets
from a number of wholesale
lenders. They come in across the
fax machine, across the computer,
or through various secure web
sites requiring confidential user
names and passwords.
On volatile days, there may be
revisions to the rate sheets.
There have been times when rate
sheets were revised more than five
times in one day.
These rate sheets are not designed
for public view. They are for
loan officers' eyes only because
they represent the "cost" of a
loan to the loan officer, not the
cost to the borrower.
Below is a sample of one section
of a rate sheet for thirty-year
fixed rate loans.
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Rate |
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Cost |
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. |
. |
. |
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6.250% |
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2.000 |
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6.375% |
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1.500 |
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6.500% |
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1.000 |
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6.625% |
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0.500 |
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6.750% |
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0.000 |
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6.875% |
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(.500) |
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7.000% |
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(1.000) |
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7.125% |
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(1.500) |
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7.250% |
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(1.875) |
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7.375% |
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(2.125) |
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7.500% |
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(2.375) |
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The
rate sheet shows the interest rate
and the "cost" to the loan
officer, expressed in "points."
One point is equal to one percent
of the loan.
Pricing the Loan
Different rates have different
costs. Higher rates don't cost as
much as lower rates. This is
because the lender is going to
earn more in interest over the
life of the loan, so it makes
sense to charge less. Conversely,
it makes sense to charge more for
a lower interest rate, because the
lender will earn less interest
over the long term.
Zero
points is called "par" pricing.
Numbers in parentheses indicate
"premium" or "rebate" pricing,
meaning that instead of having a
"cost," money is actually paid
back to the loan officer and the
branch for originating a loan at
that rate.
Almost all loan
officers are paid on commission.
The amount earned by the loan
officer and the branch is subject
to a "split" -- just like real
estate agents. Part of it goes to
the loan officer and part goes to
the branch. Any fees that are not
part of the points go to the
branch (or company) and are not
subject to the split.
Quoting Rates to You
Before quoting you
an interest rate, the loan officer
will add on how much he and his
branch want to earn. The branch
or company sets a policy on how
little that can be (the minimum
amount the loan officer adds on to
his cost) but does not want to
overcharge borrowers either (so
they set a maximum the loan
officer can charge) Between that
minimum and maximum, the loan
officer has a great deal of
flexibility.
For example, say
the loan officer decides he and
his branch are going to earn one
point. When you call and ask for
a rate quote, he will add one
point to the cost of the loan and
quote you that rate. According to
the rate sheet above, seven
percent will cost you zero
points. Six and three-quarters
percent will cost you one point.
In our example, at
7.125% the loan officer and branch
would earn one point and have some
money left over. This could be
used to pay some of the fees
(processing, documents, etc),
which is how you get a "no fees
-no points" mortgage. You just
pay a higher interest rate.
Mortgage
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