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The Truth About Rates And APR
So what is the real truth about interest rates? One of the major problems in the mortgage industry today is that there are a lot of lenders advertising what many would consider to be Low Ball interest rates. These lenders which market to the consumer through the television, radio and direct mail, often advertise a rate that seems too good to be true. It isn’t too good to be true, but it certainly is in many cases too good to be advertising! What these lenders are doing is offering an interest rate that could only be locked in for 7 days. And as we see by looking at our sample interest rate chart, a 7-day loan lock, is at the most aggressive and attractive pricing in the marketplace. There is one big problem with this tactic however, it’s misleading, for it is impossible to lock someone in on a refinance for 7 days at the time of application. With the 3 day right of rescission alone, that loan could not be closed rapidly enough to meet the lock in commitment. This technique that is used to get the phone to ring is one that the consumer needs to watch out for. These
“Low Ball Lenders” also may not take into account many
other factors that have effect on you interest rates. Things such
as:
Please keep in mind that this "example" rate sheet is intended for the purposes of educating and is not a true indication of what the prevailing market interest rate is. The interest rate chart displays a hypothetical 30-year fixed Conforming and 30-year fixed Jumbo loan scenario. A Conforming Loan is any loan that is at $310,000 or below. This limit does change from time to time, typically going up. The benefit of a Conforming loan is that it is typically purchased "Post- Closing" by one of two government agencies; Fannie Mae or Freddie Mac. The subsequent result of Fannie Mae or Freddie Mac being the purchaser of the loan, is a more attractive rate of interest for the consumer. All loans at over $300,700 are considered to be Jumbo loans. These are loans that are not purchased by Fannie Mae or Freddie Mac and are purchased by another entity. These loans carry a slightly higher rate of interest. As a consumer you should first know that when you are borrowing $300,700 or lower, you are going to get a more attractive interest rate than if borrowing higher and therefore falling into the Jumbo category. The sample rate sheet provided shows both a Conforming and a Jumbo scenario. When it comes to interest rates there is really only one thing a consumer needs and wants to know. "What is the best rate I can get and how much will it cost me?" This cost for an interest rate is typically known as points. One point is representative of exactly 1% of the loan amount. Therefore, if you were borrowing $200,000 and paying one point; that one point would cost you $2,000. If you pay two, it would cost you $4,000 and so on. The most important thing to understand is that points are simply up front money paid to purchase a more attractive rate of interest. The more points you pay, the lower the interest rate should become and subsequently so should your monthly payment become lower. One of the more important questions that you must ask yourself before borrowing money is, "How long will I need to borrow the money for?" The answer to this question will assist you in determining whether or not you should be paying points or not. The following example explains the reason for this fact. On a $100,000 loan at an interest rate of 7.5% at no points, your monthly mortgage payment would be $698.58. If you decided that you wanted to lower your mortgage rate and subsequently your monthly payment, you could pay a point which would cost $1,000 extra dollars. The result of paying the point is that you will buy your interest rate down to 7.25%, subsequently lowering your monthly payment to $681.51. The net savings for paying the $1,000 up front would be $17.06 per month. To determine whether or not it is worth it to pay $1,000 up front to save $17.06 a month going forward, we must take the up front cost of $1,000 and divide it by the savings which is $17.06. This helps us to determine how long it will take for us to recuperate that $1,000 we paid in points. In this particular case it will take 58.61 months, almost 5 years. Therefore, if you are in the loan for at least 5 years, it will have made sense for you to have paid that 1 point up front, because everything after that 58th month, you will be out of the red and into the black, and saving money. If in fact you get out of this loan in less than 58 months, then you have effectively wasted money by paying the points up front and therefore, in hindsight, should not have paid any to borrow the money initially.One last "Point" about points is that on a purchase loan they are tax deductible in the tax year that you pay them, which needs to be considered in your evaluation. It would be appropriate to consult your tax advisor on this matter. The other major component that needs to be factored into the equation when considering interest rates is your interest rate lock period. An interest rate lock is a specified period of time that the investor lending the money will guarantee that interest rate for. When a borrower chooses to lock in a loan, they are guaranteeing to the lender that their loan will fund and the transaction will subsequently close within that given lock period. If the borrower does not fund their loan prior to the lock expiring, the borrower loses their interest rate lock and is consequently subjected to the volatility that the market may bare. One big misconception is that if an interest rate expires and the market has in the interim improved, the borrower will receive the lower interest rate. When you think of this logically, it wouldn’t be fair to the investor, for it was no fault of theirs that the borrower did not take the interest rate and subsequently fund within the given lock period that they committed to. Therefore, the borrower can not benefit from a lock expiring. The rule as it relates to an interest rate lock expiration is as follows: The borrower will receive the interest rate that they locked in on, or the prevailing market rate; whichever is "Higher". You can not benefit as the borrower by not living up to your end of the lock commitment. This brings up a major dynamic as it relates to interest rates in today’s market place. It is "Critical" that you as the consumer specify how long you need an interest rate to be locked in for before considering the rate quote from the lender. The longer you lock in an interest rate, the more expensive the interest rate becomes as a result of the lengthier commitment that you are asking of the investor. The Mortgage Northwest Rate Policy All Fund Mortgage and its Loan Officers quote their clients on 30-day pricing. 30-day pricing is, in our opinion, a reasonable and ethical lock in period to be quoting. Anything less is undeliverable, unrealistic and misleading. When shopping for interest rates, it is very important that you know all of the facts. The Truth About Interest Rates is simply this: The interest rate, the points and how long you can lock that rate in for, are all items that you must know before being able to make an educated and informed choice as to which lender is offering you the best deal. APR
– What is the Annual Percentage Rate and how does it help
the borrower? When
I comparison shop for a, e.g., $200,000 30-year fixed-rate mortgage,
here is what I want to know: Assuming
the same loan, here is approximately what I would find on the TIL: The
second deficiency of the APR is that it is calculated over the life
of the loan, even though over 90% of all borrowers sell their house
or refinance their mortgage before term. This can lead borrowers
with relatively short time horizons astray. But the TIL is not totally worthless. It warns you if there is a prepayment penalty on your loan. It doesn’t tell you what it is, but it warns you, which is a good thing. If I sound cynical, it’s because I am. Conclusion:
If you are mathematically inclined, you can calculate your own APR covering all of the costs of the different loans you are considering. On adjustable rate mortgages, lenders calculate the APR for only the initial rate; the low, so-called teaser rate that is usually heralded in the headline of an advertisement. That's why you an't compare APRs on a fixed rate with an adjustable rate, or with any of the hybrid mortgages such as the 7- or 10-year fixed loans that adjust after an initial period. What
is an Annual Percentage Rate (APR)?
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. The reason why APRs are confusing is because the rules to compute APR are not clearly defined. What fees are included in the APR? The following fees ARE generally included in the APR: Points
- both discount points and origination points Title
or abstract fee Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time. Finally, many lenders do not even know what they include in their APR because they use oftware programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs! |
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