Selecting the Best Interest Rate for You
It’s important to understand the changing rate environment and how this affects you when it’s time to lock your interest rate. As your lender, we lock your interest rate when the following has occurred:
- You have an accepted offer on a property
- You have successfully cleared the inspection phase
Once you’re past both stages, we will provide you multiple interest rate/origination fee options for you to consider – detailing the differences between each one and allowing you to select which option makes most sense for your specific financial situation. As a mortgage banker, it’s our job to shop your interest rate to all the top lenders and secure the best possible rate for you. Please keep in mind that not all lenders offer the same rates — sometimes they can vary quite a bit — so you want to do your due diligence in finding a loan officer who can provide you the best rate possible.
Rates Change Daily
Mortgage rates change daily just as the stock market does. Our global economic market affects which interest rates are being offered. In many cases, rates can change quickly and up to several times each day so it’s in your best interest to be aware of this and complete your property inspection as quickly as possible.
What Causes Rates to Change?
In contrast to the stock market, if there is negative economic news, this will, more often than not, draw demand to the safety and security of Mortgage Bank Securities (MBS), Treasury Bills and Bonds. When this occurs, the demand on MBS will drive the price up yet the cost to acquire will go down – thus resulting in better rates. Although we don’t encourage to “time” locking in your interest rate, we will always provide information to give you an idea when/if we believe rates will get better. However, there’s no guarantee.
Alerus provides a one-time free float down option which means if you lock your interest rate but rates continue to improve after the fact; you have the option to select the lower interest rate as long as you’re 60 days (or less) from your closing date. This is a great feature, not offered by all lenders. A few things to note: Your interest rate must improve by 0.125% or better in order to utilize our float down option and you typically can only lock during business hours.
Which Rate is Best for You?
To better understand the different options given to you, let’s look at a few examples for a client considering locking their rate on December 27th, 2016. Their loan amount is $250,000 with 5% down payment. They have a middle credit score of 740 and we’ll lock the loan for a 60 day period.
Interest Rates, Principal & Interest Monthly Payment and Associated Costs to Acquire:
- 4.125% Rate (4.609% APR), P&I Payment of $1,211.62, Origination Fee of 0.722% or $1,805.00
- 4.250% Rate (4.679% APR), P&I Payment of $1,229.85, Origination Fee of 0.018% or $45.00
- 4.375% Rate (4.757% APR), P&I Payment of $1,248.21, Origination Credit of 0.543% or ($1,357.50)
As you can see, the 4.125% interest rate has the lowest P&I monthly payment; however, it has the highest origination fee (costs the most up-front). Typically, the market interest rate costs around ~1% origination fee. In this scenario, 4.125% would be where the market rate is at with a 0.722% origination fee. The 4.250% option costs only $45 in an origination fee but has a slightly higher monthly payment than the 4.125% option. Many times if you take a higher rate, you do not have to pay an origination fee and also get a lender credit applied to your closing costs – like with the 4.375% option. In this example, 4.375% has no origination fee and provides you with a $1,357.50 lender credit but has the highest monthly payment.
We always ask our clients how long they think they plan on staying in the home. If you’re thinking five years or so, it usually makes sense to take a slightly higher rate so you have a lower origination fee (less money you have to spend up-front). If you’re certain you’ll be there for 10 plus years or believe it’s your forever home, then it typically makes sense to take the lowest rate and pay the higher origination fee. That’ll save you money in the long run.
In our example, it’ll take 8.045 years to recoup the cost of taking the 4.125% rate versus the 4.25% rate. With that being said, if you plan to stay in the house for 8 years or less, it makes sense in this particular scenario to take the higher rate of 4.250% over 4.125%.
As each situation is unique, it’s important to discuss all options with your loan officer so you can make the most informed decision when it comes to locking your interest rate. Feel free to contact us at any time if you have any questions!