What are your mortgage rates?
The first question customers usually ask when calling a mortgage company or lender is “What are your rates?” Because of the number of mortgage programs available and the various rate and point combinations, most mortgage companies have rate sheets that are 5-10 pages long.
Getting a rate quote is just a small part of shopping for a mortgage and usually not the best way to select a lender. Customer service, professional staff, convenience, and flexibility are some of the key attributes to selecting the best lender for your needs.
In helping you assess a rate, you will need to provide answers to a few basic questions like:
- What is your purchase price?
- What loan amount are you looking for or what loan amount
- do you want to finance?
- Do you prefer a fixed rate or an adjustable rate mortgage?
- How long do you plan to live in the house?
- How many points are you willing to pay?
The purchase price or the value of your home affects the rate because it affects the size of the loan. For example, Jumbo Loans, currently over $417,000, have a higher rate. Similarly, smaller loans have a higher rate or cost more because it costs the same and takes the same effort to do $35,000 loan as it does a $200,000 loan. Lenders and brokers need to make or charge a certain minimum amount of money to cover overhead, per loan (transaction) cost and make a profit.
The type of loan (fixed or variable) affects the rate because it affects the lenders’ income and inflation risk. For example, with a fixed rate loan, if rates go up the lender could lend out money at a higher rate than they are currently loaning it to you, and therefore earn more money. With a variable rate loan since the rate the lender can charge you changes regularly their income remains consistent with their current income opportunities. Therefore with variable rate loans they give you a better rate since they know that if rates go up they can charge you more.
The length of time you will own a house affects both the type of loan you may want and the amount of points it may make sense to pay. For example, if you are going to keep a house for a short period of time (let’s say 3 years), you may be better off with a variable rate loan (e.g. a 3/1 ARM – fixed for 3 years and varies once a year every year there- after until the loan is paid off). Why? Because typically the 3/1 ARM has a lower rate associated with it than a 30 year fixed rate loan and since you will sell the house in 3 years you would not be affected by higher rates which may exist at that time. On the other hand, if you expect to live in the house for 30 years you might be willing to pay some points to receive a lower interest rate now. The lower interest rate would save you money every month over the life of the loan. The total savings in this situation should be greater than the cost of points, giving consideration to the amount that the point money could earn if invested (saved) after taxes.