“So what’s my Phoenix home loan rate”? This is the question asked to loan originators everyday from our clients and prospects. There is no simple answer and it seems to be getting more complex as the mortgage industry moves toward more risk-based pricing. Risk-based pricing allows adjustments to par pricing for risk factors such as; FICO scores, loan-to-value percentages, property type (SFR, Condo, 2-4 Units), occupancy (Primary, Vacation or Investment) and mortgage type (Interest Only, Adjustable Rate etc).
Let’s start off with the basic mechanics of fixed mortgage interest rates. Interest rates are primarily based upon the pricing of Mortgage Backed Securities (“MBS” or “Bonds”) issued from Fannie Mae (“FNMA”), Freddie Mac (“FHMLC”) and Ginnie Mae (“GNMA”). Think of a Bonds’ sales price similar to that of a Stock, it trades up and down during the course of a day. At the time of writing this article, the FNMA coupon we are tracking is selling for $101.03. This is down 22 basis points from the previous day’s closing price of $100.81. In simple terms, the consumer would have to pay an additional .22% of their loan amount to have the same rate today that they could have locked in the previous day.
“So… what does all this mean?”
In our example, the client’s interest rate could vary from 4.50% – 5.25%. The mortgage interest rate will depend on how the customer would like to set up their mortgage loan with regard to paying either higher or lower upfront fees. Clients locking in a rate should consider how long they intend to have this mortgage loan before considering the fees associated with obtaining any rate. The shorter amount of time you will have the loan, the more it makes sense to pay lower fees and have a higher interest rate. The longer your time horizon for keeping the loan, the more it makes sense to pay higher upfront fees, also known as buying down the interest rate.
A client locking in a rate of 4.50% (5.597% APR) today on a 30-year fixed FHA loan should plan on paying all the customary fees with two discount points. Customary fees would include appraisal, credit report, processing fee, underwriting fee, origination fee, title fees, and recording fees. That same client could lock in 4.75% (5.747% APR) with 1 discount point, 5.00% (5.896% APR) with no discount points and 5.25% (6.044% APR) without any discount points or origination fee. An origination and/or discount point is typically 1% of your loan amount.
With so many rates available on a 30-year fixed mortgage, how can a borrower get the best rate?
First, ask the lender to provide you with a total overall cost analysis. This should illustrate the proposed savings you will have on the loan options available to you both on a monthly and long-term basis. This analysis should also include total payments, total interest paid, total closing costs and points and balance remaining at a given point in time. One of the most important metrics to consider is how long you plan on keeping this loan on the home you purchase or refinance when selecting the right mortgage plan.
Second, we recommend working with a professional who watches, articulates and understands the interest rate markets. If you’re a consumer, it’s important to understand that interest rates can change daily, even hourly. So, if you are comparing lender rates and fees – this is a moving target on an hourly basis. If you are comparing two quotes from different lenders, you may be comparing apples to oranges. The only way to get a truly accurate comparison is to have the quotes prepared on the exact same day, at the exact same time, with the exact same terms and conditions. You also must know the length of the lock term (i.e. 15 day, 30 day, 45 day etc.) you are looking to secure, since longer rate locks typically carry slightly higher interest rates.
In conclusion, we feel that having access to valuable information regarding the total overall long-term cost, along with mortgage options that best fit their needs, coupled with market knowledge will allow you to obtain the overall lowest cost mortgage with the best loan rate available.