Understanding Rates & Why the Interest Rate You See Online is NOT the One You Will Get

Understanding Rates & Why the Interest Rate You See Online is NOT the One You Will Get

Maybe you’ve been thinking about buying a home, buying an investment property, refinancing, or getting a line of credit for some home improvement, but the interest rate you see online is keeping you on the sidelines. Understanding the intricacies of interest rates is crucial for anyone looking to enter the real estate market, whether buying a home, refinancing, or simply planning for future financial decisions.

Interest rates determine the cost of borrowing money, and even slight fluctuations can significantly impact your monthly payments and the total cost of your loan. Moreover, the federal rate, set by the Federal Reserve, plays a pivotal role in shaping these interest rates. This article explores what actually goes in to determining your interest rate and why the rate online may not be what you are offered by the lender. In fact, that is very rare.

How does the Federal Rate Impact Mortgage Interest Rates

The federal rate, set by the Federal Reserve, directly influences mortgage interest rates. When the Federal Reserve increases the federal rate, borrowing costs for banks rise. Banks then pass on these higher costs to consumers by raising mortgage interest rates. Conversely, when the Federal Reserve lowers the federal rate, borrowing costs for banks decrease, leading to lower mortgage interest rates for consumers. This relationship means that changes in the federal rate can make home loans more or less expensive, affecting how much homebuyers pay in interest over the life of their mortgage.

Why the Interest Rate You See Online is NOT the One You’ll Get

Freddie Mac posts the average U.S. rate for popular mortgages every Thursday after surveying lenders across the country. These are the rates that you’ll see or hear about in news media reports, especially when the 30-year fixed rate hits a record low.

When a lender determines your rate, there are many factors that effect that number. Your interest rate can even change from lender to lender. This is important to understand and know what to look for when discussing different loan options with different lenders. Let’s dive in…

Lenders Want Your Business

Mortgage lenders promote their own interest rates on their websites. However, what you see isn’t necessarily the one you’ll get.

Usually these “promo” rates are really an average of rates that they offer, and you’ll need to read the fine print to find out any restrictions or requirements. Most lenders offer several mortgage products, some better (less costly) than others.

What Impacts Your Rate

Here’s a breakdown of the variables a lender will consider:

Credit Score – Your score and credit history play a huge role in what rate you’ll be offered. It lets lenders know if you’re a good risk or not as a borrower. A high score of 740 or more means you’ll get a lower rate since you’ve proved you’ve handled credit responsibly in the past. Even if your score is considered “good” which would be anything above 700, you’ll still have a higher interest rate if it’s not 740 or above.

Also, the lower your credit score, the higher the rate since you’re viewed less credit worthy. 

Down payment – There are different rates depending on how much you put down. The larger your down payment, the lower the interest rate because the loan is deemed less risky to the lender. A bank views your loan more positively if there is more equity in your home. To qualify for some of the best mortgages, you need to be able to put down 20%. If you put 25% down, you get an even lower rate.

If you have less than 20% down, your interest rate will be slightly higher and you might also have to add private mortgage insurance (PMI) to your monthly mortgage payment.

Type of Property – Did you know that condos have slightly higher interest rates then single-family detached homes? A condo loan could be .125% to .375% higher since lenders view condos as more risky since they’ll be dealing with other condo owners and your homeowner’s association as well. 

Different Products – The interest rate also depends on the mortgage product. There are jumbo loans, FHA loans, VA loans, adjustable-rate loans, and conventional loans — all of which have different rates, fees and requirements.

Loan Term – Usually loans with a shorter term have lower rates. A 15-year fixed rate loan will be lower than a 30-year fixed.  ARMs (adjustable-rate mortgages), which have become popular because of improved regulations, will have an even lower interest rate.

Loan Size – Larger loans usually have higher interest rates. If you need to borrow more, the loan is considered riskier. Jumbo loans also require larger down payments.

As you can see, if you have one of the contributing factors listed above, your rate will be much higher than what is advertised out in the world. So, just be prepared.

Bonus Secret — APR!

Want to know the easiest way to compare lenders?  It’s called an APR, which stands for Annual Percentage Rate.

It includes any fees incurred for the cost of obtaining the loan.  Closing costs, any points, and an origination fee are used to come up with the APR, along with the actual mortgage rate you’re offered.

This APR number reflects the true cost of the loan. It will be a higher rate than the interest rate alone. Here’s where you really need to look at the details (and fine print) to see what each lender is actually offering so you are comparing apples to apples.

For example, a lender may offer a low interest rate but will charge 2 points. Or the lender may offer you a higher interest rate with no points. How do you know which is best or the “cheapest” money to borrow? Look at the APR. It might even be the offer with the higher interest rate. It has the lower APR since the lender is not charging you for any points.

Don’t hesitate to reach out to me with any of your questions on interest rates!  I’d also be happy to take a second look at any estimates you get from lenders or help you compare options.  Email me I’d love to help!