We hear about them all the time, especially in recent weeks. So what’s all the buzz about interest rates? …And how much do they actually affect your mortgage loan?
First things first, let’s define the term “interest rate”. An Interest Rate is defined as the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. In layman’s terms, it is basically how much you pay the bank to loan you the money. A portion of your mortgage payment each month goes towards your principal (paying down your loan), and another percentage goes toward interest (payment to the bank for loaning you the money). Therefore, your interest rate is what makes that percentage higher or lower.
So, how are interest rates determined in the market?
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation’s central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
Why do we keep hearing about interest rates going up in the news…do we really need to “buy now” before rates get too high?
The truth is, interested rates have risen. Over the last few years, market interest rates have remained around 3.5% (very low compared to the historical average). This range gave homebuyers more buying power, which allowed them to buy homes with a higher price tag. However, as rates move towards 4.5% and up, buyers are starting to lose the power they once had. This doesn’t mean everyone needs to go buy a house right away. It’s very typical for the market to rise and fall before stabilizing, but it is a good time to take a look at your situation and whether or not you should take advantage of current rates before they climb higher. Like almost everything else in life, there is no hard or fast rule. If you’re still unsure whether now is the right time for you, our Mortgage Loan Officers are standing by to help guide you.
Do all consumers get the same rate depending on when they apply for a loan?
No, in addition to general interest rates rising and falling in the market, there are several factors that can determine your interest rate that a lender can offer you as a consumer. Let’s say two borrowers lock their interest rates on the exact same day, most likely their rates will differ depending on a number of specific circumstances and factors.
Factors That May Affect Your Mortgage Interest Rate:
Your Credit Score
In general, higher credit scores receive lower rates
Rates slightly differ depending on what state you live in
Sales Price & Down Payment
You may pay a higher rate if your loan is uniquely large or particularly small
Loan Term (15 Year vs. 30 Year)
Typically, shorter loan terms have lower interest rates
Rate Type (Fixed vs. Adjustable)
Adjustable rate mortgages usually have lower rates
Rates may be lower or higher depending on what loan product you choose
Locking Vs. Floating Your Interest Rate
What does it mean to lock your rate versus float your rate?
Your Loan Officer will tell you when you are able to “lock in” your interest rate during the mortgage process. Once you do this, you are guaranteed that rate on your loan for a specific period of time (rate lock period), and the price will not change before closing unless the lock expires. Rate lock periods are usually offered as 30, 45 or 60 days. Keep in mind that even though your rate cannot go up during this time, it also cannot go down, so be sure to consult a professional on when the best time to lock your rate may be.
Some people choose to “float” their interest rate. This means your rate will go up and down with the market, and a price is not guaranteed. In essence, you are taking on the risk that the rate may go up before you close on your loan, in order to be able to take advantage of a lower rate if they do fall. This is more of a gamble but can pay off in the end if rates go down during your home loan process.
How do I know if it’s best to lock in my interest rate or to let it float?
Mortgage interest rate movements are as hard to predict as the stock market, and no one can really know for certain whether they’ll go up or down. If you have a hunch that rates are on an upward trend then you’ll want to consider locking the rate as soon as you are able. Before you decide to lock, make sure that your loan can close within the lock-in period. It won’t do any good to lock your rate if you can’t close during the rate lock period. If you’re purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 30 days. However, if you have any secondary financing on the home that won’t be paid off, allow some extra time since we’ll need to contact that lender to get their permission. If you think rates might drop while your loan is being processed, you may want to take a risk and let your rate “float” instead of locking. After you apply, you can lock in by contacting your Mortgage Loan Officer.
What is an APR? Is comparing APR’s the best way to decide which lender has the lowest rates and fees?
The Federal Truth in Lending law requires that all financial institutions disclose the APR when they advertise a rate. The APR is designed to present the actual cost of obtaining financing, by requiring that some, but not all, closing fees are included in the APR calculation. These fees, in addition to the interest rate, determine the estimated cost of financing over the full term of the loan. Since most people do not keep their mortgage for the entire loan term, it may be misleading to spread the effect of some of these upfront costs over the entire loan term. Also, unfortunately, the APR doesn’t include all the closing fees and lenders are allowed to interpret which fees they include. Fees for things like appraisals, title work, and document preparation are not included even though you’ll probably have to pay them. For adjustable rate mortgages, the APR can be even more confusing. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments. You can use the APR as a guideline to shop for loans but you should not depend solely on the APR in choosing the loan program that’s best for you. Look at total fees, possible rate adjustments in the future if you’re comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage. Don’t forget that the APR is an effective interest rate–not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.
Should I pay discount points in exchange for a lower interest rate?
Discount points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay them up front at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing, however, you will have lower monthly payments over the term of your loan. To determine whether it makes sense for you to pay discount points, you should compare the cost of the discount points to the monthly payments savings created by the lower interest rate. Divide the total cost of the discount points by the savings in each monthly payment. This calculation provides the number of payments you’ll make before you actually begin to save money by paying discount points. If the number of months it will take to recoup the discount points is longer than you plan on having this mortgage, you should consider the loan program option that doesn’t require discount points to be paid. Don’t know what your monthly payment looks like yet? Use our payment calculator for help!
When can I lock in my interest rate and discount points?
You can lock in your interest rate and discount points as soon as your loan is approved and you pay the application deposit to cover the cost of your appraisal and final credit report. The application deposit is not another fee, it’s actually just the appraisal cost estimate and will be credited to the actual appraisal cost at your closing. If you complete your application today, and your request is approved online, you’ll have the opportunity to pay the application deposit via credit card and can lock in your great rate immediately.
The Southern Trust Mortgage Rate Lock Policy
The interest rate market is subject to movements without advance notice. Locking in a rate protects you from the time that your lock is confirmed to the day that your lock period expires.
A lock is an agreement by the borrower and the lender and specifies the number of days for which a loan’s interest rate and discount points are guaranteed. Should interest rates rise during that period, we are obligated to honor the committed rate. Should interest rates fall during that period, the borrower must honor the lock.
When Can I Lock?
Your Morgage Loan Officer will be notifying you when you are able to request a lock.
We do not charge a fee for locking in your interest rate. For lock terms exceeding 60 days, an upfront fee may be required, please discuss these options with your Mortgage Loan Officer.
This means your loan must close and disburse within this number of days from the day your lock is confirmed by us.
Once we accept your lock, your loan is committed into a secondary market transaction. Therefore, we are not able to renegotiate lock commitments.