Interest Rates: It’s More Than a Number
Interest Rates: It’s More Than a Number
For those watching the trends in mortgage interest rates, a quick Google search reveals articles such as this – highlighting the historically low trends we’ve recently seen. For buyers currently shopping for a home, interest rates moving up and down make a big impact to their buying power – and when interest rates begin to rise, it can cause concern or even panic. Don’t get us wrong – interest rates are very important, but there’s more to the picture that many buyers overlook. In our experience, there are a few factors to review when buying a home – and only one is the actual interest rate. Today we dive into these items, and what to look for when you shop mortgage lenders.
Origination / Underwriting Fees
Virtually every lender has this type of fee, which is an administration fee. This fee goes toward a lender’s staff to underwrite and work on the loan, but the fee is often easy to miss. Often we find that lenders will adjust the origination fee based on the interest rate, which can effectively hide what you’re paying. As an example, if the rate a lender is offering is 2.875% with $500 in origination fees, if you accept a rate of 3% your origination fee may no longer be listed. Although discount points play a role (below), it can often be difficult to compare origination fees between lenders. At Stockton, we offer a flat origination fee which I feel helps buyers to be educated on the choices they’re making.
Many buyers aren’t aware that you have options when it comes to the rates you choose. As a Loan Officer, I tend to review the interest rate that’s as close to neutral as possible – meaning, the buyer doesn’t have to pay very much or won’t receive a high lender credit. However, there’s usually a sliding scale where you can buy down the rate (also known as a discount point) or receive a higher rate along with a lender credit. This article from the CFPB highlights how points and credits work. In my experience, it can be common for the price you’re paying for a rate to be buried in the disclosures if the Loan Officer you’re working with didn’t discuss this with you. Many buyers prefer to not buy down the rate, unless they intend to be in the home for the long term (15+ years). Be sure to ask questions and understand the fees involved, and at Stockton Mortgage we stive to be transparent in this area.
Finally, we get to interest rates. The rate that we pay has a large factor in your buying power when shopping for a home. In 2020, news headlines such as “Mortgage rates sink to record low again” were very common while the world came to grips with Covid-19. Rates have slowly been on the rise since then, and I have personally spoke with buyers who are concerned about the rise in rates. There are a few items to keep in perspective as rates start to rise. For one, interest rates are still significantly lower than recent generations and the rates of their mortgages. If you ask your parents or grandparents the rate they paid, you’ll see what we mean. Two, I often find that the monthly payment hasn’t shifted significantly for most buyers. A monthly payment has 4 components, of which only one is interest (the remainder is principal, taxes, and insurance). So, while having a lower interest rate is ideal, as rates slowly rise, it doesn’t cut into buying power as much as many buyers expect. Lastly, depending on your financial situation, you can typically buy down the rate to an interest rate you’re comfortable with (see above).
As a Mortgage Banker, I always provide a Closing Cost Worksheet to our buyers to help prepare them for what to expect when shopping for a home. No matter the lender you choose, make sure you ask questions and are comfortable with what you are offered, to avoid difficulty when under contract.
Authored by Nick Edgerly, Mortgage Banker NMLS#: 1912730
Nick, a native of southern California, has called Lexington home since 2014. Him and his family have come to love their community; Nick says, “I agree with the popular, local t-shirt that says, ‘Heaven Must Be a Kentucky Type of Place’.”
This article is for informational purposes only. It should not be interpreted as legal or accounting advice by Stockton Mortgage.