Interest Rate thoughts got you down? Let me lift you up
Did you know the average mortgage interest rate from 1971 to 2017 (for a conventional loan with a borrower putting 20% down payment and a 740 credit score) was 8.21%? 30-Year Fixed-Rate Mortgages Since 1971
As for rates on November 26, 2018, the current average rates are in the low 5% range – still well below the aforementioned 30 year average. Recent rates have been rising since the historic lows from 2016 and are only now just approaching the interest rates last seen in 2009.
In today’s world, most prospective borrowers I speak with wonder what rates are available to them. Without additional information from a prospective borrower, it is difficult to provide an accurate estimate.
Borrowers and Loans Types are not the same
A borrower’s credit (comprised of payment history, monthly debt obligations and credit score) along with their income source impacts the borrower in four ways:
- ability to qualify for a loan at that time,
- how much they can qualify for,
- the loan product options, and
- the available interest rate for you – there are minimum credit scores for each loan type and also debt-to-income ratios to compare with each loan type to determine interest rate.
All of the above can then be compared to how a borrower fits into the common loan types:
- conventional (Fannie Mae or Freddie Mac),
- government (FHA, VA, USDA), and
- jumbo loan products (in Tucson, AZ for 2018 jumbo means loans over $453,100)
Once a lender has analyzed your circumstance, you are able to determine your options for your interest rate.
Lowering your interest rate
Add Discount Fees To Your Closing Costs
The quoted interest rate from a lender will, in many cases, provide you the opportunity to lower your interest rate through lender discount fees. These are fees added to the closing costs and payable at closing along with other typical closing costs (from the lender and title/escrow company). A lender may charge discount fees to lower a borrower’s interest rate from the available interest rate. Here is where you will always request in writing a lender’s breakdown of costs when they quote an interest rate to you. A lender may quote over the phone (or on the internet) a very low rate, but the rate may include discount fees in order to have the low rate available.
As rule of thumb, you could estimate you could lower your interest rate by 0.125% in rate at a cost of 50-60 basis points (0.50% to 0.60%) on the loan amount. Accordingly, you may potentially lower your interest rate by 0.25% with discount fees of 100-120 basis points (1% or 1.2%) of the loan amount. For example, on a $200,000 loan amount, a lender discount fee of $2000 to $2400 may lower your rate by 0.25%.
As a reminder, during negotiations with the seller on the purchase of a home, the seller may agree to provide “seller concessions” to be applied to the buyer/borrower’s closing costs. This allows for you the option to have the seller concessions assist in lowering your interest rate to cover the discount fees. Please note – there are limits as to how much you can receive in seller concessions based on loan type.
One issue I would carefully discuss with your lender with respect to discount fees is to analyze the cost versus the benefit of the interest rate discount fees. If there is importance in the monthly payment improvement or you expect to live in the home for more than 5 years, then the cost is likely warranted and beneficial. Please be sure to have the discussion of the analysis with your lender to ensure you are explained the options clearly with this strategy in mind.
Increase Your Qualifying Credit Score
During the loan application process, mortgage lenders obtain a borrowers credit report from a credit reporting agency which includes three credit bureaus (Experian, Transunion, and Equifax) to obtain a qualifying credit score. The middle score (not the average) from the three bureaus is considered the qualifying score. Side note: If a borrower only has two credit bureaus reporting a credit score, the lower score is then considered the qualifying score.
As mentioned earlier, one of the variables in determining your available interest rate is your qualifying credit score. There may be options to assist you in improving your credit score in the short-term – such as paying off (or paying down) certain debts; but there are also longer-term situations where a credit repair specialist may be engaged to rehabilitate your credit score. If your credit score is over 700, there may be less opportunity to improve your interest rate as credit scores improvements assist best assists borrowers with credit scores under 700.
Please note: The opportunity to improve your credit score is subject to your credit history and is not uniformly applicable to all potential borrowers. Each borrower’s circumstances will affect how much their credit score can be improved.
Who reports to credit bureaus? Credit bureaus receive information from (including but not limited to):
- credit card companies (and their associated banks)
- car loan companies
- mortgage companies
- student loan providers
- banks and credit unions, if a line of credit was extended
- a company that files collections or charge-offs against a borrower (such as utility companies)
So do not let interest rates get you down! Let me help you keep your interest rates down.
Please contact me to help you determine the best ways to approach lowering your interest rates.
It would my pleasure to assist you with your mortgage needs. My promise to all my clients is to be honest with you, work hard for you and exceed your expectations. Please know my main function is to be your loan advisor and I look forward to speaking with you.
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