Among those questions most persistent to man a few stand more persistent than the rest. “What is the meaning of life?”, “Could God microwave a burrito so hot that even he get’s burned by it?”, “What should I say when she asks if those jeans make her look fat?” and finally, ‘Hey Adam, can I get a lower rate?’.
Lives and centuries of lives have been devoted to solving these most illusive quandaries, each to varying degree of success. While we still can’t say for certain why Donald Trump thinks his hair looks cool, a team of expert scientists funded by The Better Banker have recently provided us with the answer to one great question. HOW DO I GET A LOWER RATE? Fear not my friends, The Better Banker is here to help.
There are 4 key factors in determining an interest rate. Everything else has little or no effect whatsoever on your final rate so don’t buy the hype. Without further adieu…drum roll please….
The Four Keys To The Lowest Rate Possible:
- Your Credit Score~ It should come as no surprise to you that your credit score is a major part of the interest rate you receive. A credit score is the modern day equivalent of small town trust. It used to be that back in the days before Fannie Mae, FHA and Freddie Mac were a twinkle in Uncle Sam’s eye, the local small town bank made all of it’s own lending decisions. Back then, a credit score wasn’t needed because everyone in town knew one another. As the financial system has grown, separating borrowers from their lenders, a credit score has become increasingly important. A credit score is basically a measurement of whether or not a person can be trusted with other people’s money. There are many factors affecting a good score which I’ll get into in another post, but until then, suffice it to say, the higher the score, the more trustworthy a person is considered to be. High trust equals low risk. Low risk equals lower interest rates. Makes sense, right?
- Your Down Payment~ Increasing your down payment decreases your loan amount. This very simple equation has a couple of positive effects on rates. First, because the loan amount is lower, relative to the value of the home, it creates more equity in the house. This means that should the lender have to take the home back (in foreclosure) they are less likely to lose money by being underwater. More important though is that banks understand that when a home owner has equity in a property, they are much more motivated to stay in the home and pay off the loan. Putting down a larger down payment shows a bank that your interests and theirs are aligned. This results in a lower interest rate.
- Your Fees~ Forget everything you’ve ever heard about closing costs, here is all you need to know. There are really only two fees that directly to your interest rate. The first is the “Origination Fee” and the second is the “Discount Point”. I’ll actually do a separate post on how these fees relate to Banker compensation, but suffice it to say that if you’re paying an Origination fee, your getting the lowest natural (or ‘par’) rate the market has to offer. If you paying a Discount Point, you should be getting a rate that is below the best rate in the market at any given time. Conversely, if you’re not paying any fees at all, your rate is a bit higher than the best rate in the market place that day. These facts are true regardless of what your Banker or Broker has told you. Determining when to use fees and when not to is a pretty easy calculation, but one that I’ll cover later as well.
- The Big One That Few Borrowers realize!~ The timing of your closing. ‘Say What?’ you might ask in your best Duane from Good Times impression. Yep, the number of days that your interest rate is locked significantly affect your interest rate. This is a fact not well understood by Real Estate Professionals, and rarely, if at all, even known by borrowers. Each day, the mortgage markets publish a ‘par’ interest rate. The word ‘par’ just like in golf, refers to a price that is neither under or over the limit of return. That is, it’s a rate which is does not require a discount point, and likewise pays no premium. The par rate is based on a 30 day lock. That means that the rate offered can be locked in at no additional cost as long as the loan is closed and funded within 30 calendar days from the date of lock. This creates a strong incentive to close the loan within 30 days. Since the 30 day lock is the standard by which the rest of the market is set, it stands to reason that locking for more or less time than 30 days can produce changes in costs. For instance, a 15 day lock can reduce the interest rate by as much as .125%. If the loan can be processed, underwritten and the property appraised in that time frame, a 15 day lock can be a great option. Likewise, asking for more time will either increase the interest rate by as much as .125% for every 15 additional days locked or will cause an increase to closing costs to offset the increase in lock days.
I may not have much insight into the questions of the ages, but if a lower rate is what you’re after,you now have the tools to bend the market in your favor. Take full advantage of the 4 keys above to ensure you’re getting the very best interest rate for your situation. Of course, when it comes time to actually lock your loan, be sure to consult The Better Banker to make sure you’re getting an unvarnished view of what the market is actually doing.
Until next time, I wish you better banking!