How Do Mortgage Interest Rates Work?
The interest rate offered an individual borrower is impacted by their credit score, the mortgage program they qualify for, the loan term desired, and economic and market factors outside of the borrower's and the Mortgage Professional's control.
How can Mortgage Professionals quote different rates?
Unfortunately, industry advertisers often launch marketing campaigns that offer an unusually low, "teaser" interest rate simply to make the phone ring. This abnormally low rate may only be available for a specific loan program that fits a small pool of qualified borrowers, but they won't tell you that upfront.
The truth is, mortgage interest rates are not controlled by lenders, and can fluctuate up to several times in any day. Once you understand how rates are determined, you'll feel more comfortable about your mortgage interest rate and the home financing process.
Keep in mind that although loan programs, credit scores and economic factors affect the mortgage interest rate you're offered, the borrower always has the option of paying a one-time, upfront fee to secure a lower interest rate.
What determines mortgage rates and what causes them to change?
Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined and impacted by economic indicators and the "Secondary Market." The Secondary Market is actually the term applied to investors who purchase funded home loans. These investors either hold the loans for the interest income, or bundle the loans into Mortgage Backed Securities (MBS) and sell them to other investors.
The value of Mortgage Backed Securities (MBS), inflation, decisions made by the Federal Reserve, unemployment statistics, Gross Domestic Product and global politics are just a few of the factors that impact mortgage interest rates.
What's the difference between the mortgage interest rate and the APR?
The mortgage interest rate and the loan term are the figures used to calculate the payment on your loan amount. The Annual Percentage Rate (APR) of a loan is actually "the cost of borrowing money." APR is calculated by adding in discount points, origination, buydowns and loan fees to arrive at a figure that reflects the total cost of any given loan.
You can use APR as a general guide to compare various loan scenarios. The higher the APR, the higher the fees being charged. As you can see, a low interest rate loan that has a high APR may or may not be the best deal. Your Mortgage Professional will help you determine which loan closing cost and rate scenario makes sense for your short and long-term financial goals.
Why is an Adjustable Rate Mortgage (ARM) rate lower than a fixed rate mortgage?
ARM loan rates are tied to one of several indexes, such as the London Inter-Bank Offer Rate (LIBOR) or the Treasury Bill index. Some initial ARM interest rates and payments vary greatly from rates and payments due later in the loan term, and can adjust every month, quarter, year, 3 years, or 5 years. The period between rate and payment changes is called the adjustment period.
Questions your lender should be able to answer about mortgage interest rates:
- What determines mortgage rates and what causes them to change?
- What's the difference between the mortgage interest rate and the APR?
- Why is an Adjustable Rate Mortgage (ARM) rate lower than a fixed rate mortgage?
Choosing the Right Mortgage Loan Program
We can't emphasize enough how important it is to work with a knowledgeable Mortgage Professional. Every homebuyer needs an industry pro that understands the many loan programs available, and is able to determine which loan is appropriate for a particular borrower.
We realize there are many different types of borrowers who seek affordable home financing, and we understand that our job is to locate affordable financing that works for you.
What category of homebuyer are you?
We've provided an overview of the many types of buyers who want to purchase or refinance a home, and a list of just a few of the available mortgage programs that might fit your individual scenario. Whatever your needs, we can provide you with options that will both suit your financial situation and provide you with the home loan financing you require.
Programs for First-Time Homebuyers
- Government guaranteed FHA, VA and USDA loan programs
- Fannie Mae's Community Home Buyers Program
- Local and State Down Payment Assistance Programs
- Nonprofit Organization grants
Loans for credit compromised borrowers:
State and Local Housing Programs
Your Mortgage Professional can also tell you all about first-time homebuyer loans, down payment assistance and tax credit programs that may be offered at the state and local level for low to moderate income borrowers. These programs typically offer lower upfront fees and more lenient qualification.
Renovation loans include the purchase price plus the cost of improvements. These loans are ideal for the purchase and rehab of foreclosures, as well as combining an upgrade and remodel with a standard home purchase or refinance.
- FHA 203(k), Streamline and full
- Conventional rehabilitation loan
Reverse mortgages (also called HECM loans) are FHA-insured loans available to Seniors aged 62 and over. These loans allow the homeowner to access the equity in their home. The borrower is not obligated to repay the loan until they no longer occupy the home as their primary residence.
- Reverse Mortgage
- Reverse Mortgage for a home purchase available in many states
What is the difference between conventional and FHA loans?
Conventional loans are classified as "conforming" or "non-conforming" loans. The credit, income, down payment and loan amounts of conforming loans comply with the loan guidelines established by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs).
These stockholder-owned corporations buy loans from mortgage lenders that "conform" to their loan guidelines, then bundle and re-sell them to investors on the Secondary market. GSEs provide a consistent flow of funds for home financing.
Conventional, conforming loans:
- FRM: Fixed Rate mortgages
- ARM: Adjustable rate mortgages
Conventional, non-conforming loans:
- FHA: standard, 203(k) renovation loans, Energy Efficient mortgages and Reverse mortgages
- VA: Veteran's Administration loans
- USDA: government-guaranteed rural home loans
Jumbo: "Jumbo" loans have loan amounts higher than the maximums set by Fannie and Freddie
Government loans are guaranteed or insured by the Federal Housing Administration, the United States Department of Agriculture, or the Veteran's Administration. Each institution sets the loan terms and conditions for their respective type of home loan.
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