It always amazes me when my phone rings and on the other end their is a voice who says, "What is your current interest rate?" Through the years I have had many different answers, but today I answer that question with several questions of my own.
- What is your middle credit score?
- What is your debt to income ratio?
- What is your loan to value?
- How much money do you have is your accounts?
- What type of loan product are you interested in?
What type of loan transaction will this be?
The list could go on and on. If you do not know the answer to the above questions, then how can I quote you a rate?
There are so many details that go into truthfully quoting an interest rate that without the full picture, shoppers are wasting their time. The same could be said for those that ask for a GFE without giving all of the details. The Good Faith Estimate is full of "estimates" and the bottom line may look better from one lender but the truth is, it is only as good as the person estimating. Some will estimate low to secure the deal and worry about the explanations of increase later and some will estimate higher so there are no questions.
What determines my rate?
Mortgage Backed Securities (MBS) move the market. This market moves much as the Stock Market. Generally mortgage bonds are a safer investment than stocks and if stocks are worse, usually MBS is better therefore as money goes in, rates come down. In reverse, if the stock market is thriving usually money is coming out of MBS and as it goes down, rates go up.
Emotion drives these markets in both directions based on consumer and investor emotions.
When the FED changes interest rates, what does this mean for me?
The Federal Reserve influences short term rates aka Fed Funds Rate. Example of short term rates are Home Equity Line of Credit (HELOC) where rates change monthly. The Federal Reserve Board meets every six weeks and this always causes speculation.
Remember, when short term rates drop, we can usually look for long term rates (fixed mortgage rates) to go higher creating potential for inflation.
Do different loan programs and products have different interest rates?
Sure they do, otherwise every loan would be identical and no need for different programs. Conventional, FHA and VA loans can all have very different rates on the same 30 year fixed product. FHA and VA loans are insured by the Federal Government. Conventional loans are insured by Private Mortgage Insurance companies (PMI) if loan amount is over 80% loan to value.
Most investors view government backing as less of a risk so FHA and VA financing usually have a lower interest rate. Once again rate may be lower with FHA but overall it takes a skilled loan officer to compare the two and give you the long run benefits of each based on your individual needs.
Why did my friend get a better rate than I did? Did I get ripped off?
Mortgage interest rates are based on risk based pricing. This allows pricing adjustments to par pricing for, credit scores, loan to value, type of property, occupancy and mortgage type, loan product etc...
This allows the investor who lends money for mortgages to receive a higher interest rate for taking additional risk lending to less than perfect borrowers.
If your rate is higher or lower than your friend, it is probably because your overall picture was better or worse. Also keeping in mind rates could be lower today than they were yesterday so timing could have made a difference. To effectively compare, you must know what you are doing and that takes years of practice. Stick with the expert, integrity and honesty will shine through and the whole process will be much easier.
Yours to Count On,
My name is Valerie Springer nmls 198479, Home Mortgage Expert and writer for Ask Val in Birmingham, Alabama. You may contact me by email at email@example.com or call 205-995-7283 x 305.