Tuesday, February 26, 2008

What are your Rates?

Loan Originators are tied to interest rates. Our lives begin and end with interest rates. Though often times the difference between 6.25% and 6.125% is less than $20 a month, it can mean the beginning of the end for a deal. Competition is plentiful between mortgage companies but in the end the consumer should choose the company with the best service and products. Today, I want to briefly discuss a few key ideas about interest rates as well as explain the relationship between the Federal Funds Rate and the Long term 30 YR fixed rate.

Rates can fluctuate daily and hourly.
  • During the past few weeks, rates have been as low as 5.375% on a 30 Yr Fixed loan to as high as 6.5%. These fluctuations are tied to the long term bond market prices and rates (not the Fed Funds Rate - more on that later). With the market and its recent volatility it is important to understand that choosing to play the "rate game" may end up costing you, the consumer, in the end.
  • Constant adjustments occur, so if you are thinking of purchasing a house, understand that a quote on a Monday may very well be unavailable on Friday (save Monday evening depending on conditions). Instead of focusing on the rate focus on the payment and housing affordability.
  • If you are refinancing, make the move only if the costs associated with the new loan don't outweigh your new reduced payment. (Talk to an experienced lender and they should be able to let you know what Interest Rate makes sense and where your break even point will be with the new loan)

Rates are different among Lenders

  • Many lenders quote rates differently, some quote rates based on charging origination fees, some do not (I happen to quote rates based on no origination or broker fees to the customer)
  • Lenders do not all have access to the same investors, thus the difference in the rates between lenders. Find a lender you trust to get you the best deal possible and work with them.

Historical data about Interest Rates

  • From 1983-2006 the average 30 YR Fixed Interest Rate is 9.12%. (See http://www.homefinders.com/historical-interest-rates/ for the chart.)
  • Current average rates on 30 YR Fixed loans are about 6.25%-6.75%. Anything between, below, or even a bit above these rates are great. If you have a high interest loan it may be time to refinance.


Unfortunately, the Fed Funds Rate (Prime Rate) is not tied to the 30 YR Fixed (long term) rate. Though it may appear that way, the recent change with interest rates was due to the bond market and its changes. The volatility of the economy and the stock market have attributed somewhat to the rate fluctuations and as long as it remains volatile we may see swings in both directions. Eventually you need to ask and answer three questions...

1) Do I trust my loan originator? 2) Am I getting a good deal? 3) What payment can I afford?

By answering these questions, you may discover the process of purchasing and/or refinancing to be educational and come to think of the interest rate as the secondary aspect to the deal.

Stay tuned for Part 3 - Underwriting and Appraisals...

1 comment:

meyer said...

Eric, thank you so much. I don't have time to read up on these types of things and do not understand any of it when I do refinance, so I appreciate you taking the time to put it in simple terms. It's making sense to me and I'm learning! Wooohoo. Thanks so much.
Michelle Meyer

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You can find great local Scottsdale, Arizona real estate information on Localism.com Eric Murrietta is a proud member of the ActiveRain Real Estate Network, a free online community to help real estate professionals grow their business.