Mortgage Interest Rates - Explained

Here's a little "Mortgage 101" to help you understand some of the most common characteristics of a mortgage loan.
For purposes of an example, let's say you’re shopping for a 30 year fixed rate mortgage. Rates range from 6.00% to 6.25%, 0 Discount points and 0 Origination fees.

What does this mean?
30 year - This means your loan is set up to be paid off in 30 years.
Fixed - This means your rate & payment will not change for the length of the loan.
6.00% - This is the interest rate at which you would be charged on your loan.
Discount points and Origination points - These are basically the same thing, you’re paying in advance, at the time of your mortgage closing, to receive a lower mortgage interest rate, also known as Pre-Paid interest.
 
One "point" = 1% of your loan amount.  
Therefore, one point on a $150,000 loan would cost you $1,500.  
The problem is that in most cases the reduction in interest rate is not enough to justify the amount of pre-paid interest (discount points and origination fee) charged.

WARNING
This is the area where most people get confused when they see lower rates published in the paper or on the internet.
The lower the rate, the higher the probability that there are fees associated with getting that rate that may not be to your benefit. Some companies go as far as telling you there are no additional fees or point associated with getting the lower rate. Use common sense,
If it sounds too good to be true, it probably is!

To see what rates were actually LOCKED for the last few weeks (or historically) click on this link: www.freddiemac.com **Please notice that the rates also show the corresponding points that were paid to get that rate.

Why Is This Important To You?

Freddie Mac and Fannie Mae are the two largest issuers of mortgage-backed bonds in the country, the above Freddie Mac web site only reports the rates that were LOCKED - not advertised. (Fannie Mae does not have this feature)

This site does not advertise mortgage rates, it only reports them.
Therefore, you get an unbiased information to make your best decision on weather the rate you are being quoted is actually the rate that is currently being locked by brokers and lenders and what the cost of obtaining that rate is.

If you are being quoted a much lower rate that what you see being locked here, your probably being deceived.

Don't Be Fooled

Question: Paying points or high origination points or fees makes the interest rate lower, so that a better deal, Right?
Answer: Rarely, many times people lose money and don't even know it.

To correctly assess the possibility that paying points will benefit you, you must know;
a) The minimum amount of time that you are sure you will stay in the home
b) The actual cost of the points in dollars
c) The dollar difference between payments when paying points and not paying points

Let's say you have been quoted 6.25% with no points and no Origination fees, and you see another quote for 6.00% with a one point origination fee.  Your loan amount is going to be $150,000.00 for 30 Years. Which one is the better deal?

Start by answering the above questions:
a) The minimum amount of time that you are sure you will stay in the home, this should be at least 4 years.
b) The actual cost of the point(s) in dollars (One point = 1.00% which equals $1,500.00
c) The dollar difference between payments when paying points and not paying points.
            6.25% No Points = $923.58               6.00% One Point = $899.33

It looks like you will save $24.35 each month by paying the origination fee.
But you paid $1,500.00 for that lower rate - how do you compare them?

Take $1,500.00, the cost of getting the lower rate, and divide it by the $24.35 Result = 61.60 months

This tells you that you must stay in the home for at least 62 months (5 years and 2 months) just to break even.

Question: What if you have to move in 3 years?  What happens to the $1,500.00 investment you made in getting that lower rate?
Answer: In this scenario, you actually lost money by paying points.

Question:  Is The Lowest "Published" Rate Always The Best?
You always want to get the best terms for your loan. But your search may not always bring you just what you expect if you are only looking at the interest rate.
Some lenders publish artificially low rates that they can't actually deliver, or require large upfront fees. So you need to know all the costs that are associated with that rate to make an educated decision. That requires a Good Faith Estimate of the costs, as well as a Rate Lock Agreement signed by the Lender - guaranteeing you that rate. Otherwise, if an issue arises about your rate or costs, you will have nothing to use to prove that you were actually promised that rate.

Question:  What Causes Rates To Constantly Change?
There is no easy answer to explain what causes rates to change. Rates fluctuate up and down, day to day, hour by hour. Money is a worldwide commodity, and any significant event around the world that looks like it may even remotely affect the economy is reason for interest rates to move up or down. Examples are politics, wars, economic indicators (i.e. employment data, new home sales, car/truck sales, factory orders, etc.), government statements or unrest, natural disasters (i.e. floods, earthquakes, famines, etc.). All it takes is a publicly voiced theory or assumption from an influential person (i.e. Federal Reserve Chairman, President of U.S., etc.) and the rates can make sporadic moves.

In conclusion, simply stated, Do the following.
*Do your homework.
*Ask lots of questions and document the answers. I.E. Get a Good Faith Estimate and Rate Lock Conformation outlining points, as well as lender and broker fees that will be charged to you in order to acquire the rate you are being promised.
* Contact and use mortgage providers that have offices in the state you are financing your property. Connecticut has full licensing authority to monitor and deal with issues arising from mortgage providers with offices located within Connecticut. They don’t have this ability with mortgage providers outside of Connecticut.
*Ask for references of past customers so that you may verify the mortgage provider’s track record.
* Know you credit score so that when you’re shopping for rates and terms you can do so without having to provide the mortgage provider with too much personal information. If they won’t give you the information without getting your personal information and social security number so they can pull your credit report, hang up and move on! You can pull your credit report once a year, without charge from www.annualcreditreport.com