Getting the Lowest Interest Rate

 In Common Questions, First-Time Home Buyers

Everyone wants to get the lowest interest rate for their mortgage, but how do you get the rates you see advertised on the internet, in the paper, on the TV or radio, etc.?

Here are some tips to help you get the lowest rate possible.

Interest Rate Factors

There are many things that determine what your interest rate will be, including your credit score, how much you are putting down, the size of the loan, the type of property (condos have higher rates), the number of units in the property (1-unit, or 2-4 units), the occupancy type (primary residence, second home, or investment property), etc.

Par Rate

Once all of these things have been factored into determining what you interest rate will be, you will have what is known as your “par” rate.  This is the lowest rate you can get without “paying points”.

Points

Points is another name for up-front interest.  If you are willing to pay the lender some money at the closing to cover the interest they will be losing by offering you a lower rate, they will give you that lower rate for the life of the loan.  

The wonderful thing about paying points is that lenders know you will probably either refinance the loan, pay it off, or sell the house before the term of the loan is up (typically 30 years from now).  They know they will not be losing 30 years of interest – they will only be losing a few years of interest. Most people only keep a loan for about 5 years, and the lenders know that, so they will only charge you enough up-front interest (points) to cover that loss.  

If you keep the mortgage for longer than the lender thinks you are going to keep it (again, usually about 5 years), you will benefit by paying points because you will get a lower rate for the next 30 years, not just the 5 years or so you paid the interest for.

The amount you have to pay in points changes all the time, depending on how the mortgage bond market trades.  Many lenders will tell you that paying 0.5% in points will lower your rate by .25%, or that paying 1% in points will lower your rate by .5%, but that is not true.  There is no direct correlation between the amount you pay in points and the interest rate. It changes all the time.

Case Study

Here’s an example of how paying points works.

Let’s assume you are buying a house for $335,000 and are putting $85,000 down (making the loan amount $250,000), you have excellent credit, and the house is a primary, single family residence with one unit.  A recent rate sheet indicates the par interest rate (the rate that doesn’t cost you anything in points) would be 4.875%. Your monthly principal and interest payment would be $1323.

Now, let’s say you, like most people, wanted a lower rate.  Instead of settling for a rate of 4.875%, you could pay .388% of the $250,000 loan amount and get a rate of 4.75%.  That amount you would need to pay is $970, which is .388% of $250,000. By getting a rate of 4.75%, your monthly principal and interest payment would be $1304, or $19 less per month for the next 30 years.  That comes out to a 30-year savings of $6,840 for an investment of only $970. That’s a pretty good deal.

If you wanted an even lower rate of 4.625%, it would cost you 1.068% in points, or $2,670, and your payment would be $38 less per month.  That comes out to $13,680 over the life of the loan.

An even lower rate of 4.5% would cost you 1.237% in points, or $3,092, and would lower your payment by $57 per month, or $20,520 over the life of the loan.  

Summary

Again, the figures in this example are based on a recent rate sheet, and these exact numbers will not be in effect when you lock your interest rate.  However, regardless of how high or low interest rates are when you do lock your rate, there is always the option to pay points and get a lower rate for the next 30 years.

We have some great software that we will show you when it is time to lock your rate.  It shows the various interest rates available, the cost in points for each rate, the monthly savings, the savings over the first 5 years, and the savings over the life of the loan.  Once you see the report from the software, it will be clear which rate makes the most sense for your individual situation.

Contact us today to get started with a pre-approval.  

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