INTEREST RATES

 Often I receive phone calls with regard to what my interest rate is on any given day.  Normally I give a range of where the rate might be.  The reason for this is not because I want to be evasive but there are several factors that go into an interest rate.

1) As many people know interest rates are not set.  They fluctuate depending on what is happening in the financial markets on a daily basis.  What interest rates represent is the cost of money as a commodity.  In other words, money for sale. The cost of the money changes from day to day or even hour to hour.  There are times when rates are stable and we don't see much difference from day to day. But if the markets are volatile, interest rates will be too. I have seen interest rates change five times either up or down in one day. The bottom line is-if you like the rate and the payment-take it.

2) Loan Amount: Typically speaking, if the loan amount is low, the rate may be a bit higher.  Let's think about that for a moment.  The investor makes their money off the interest on the money. A lower loan amount is going to generate less money.  Therefore, as in any business there are profit margins to be maintained-so the rate may be a little higher to increase profitability. 

3) Type of loan:  Whether the loan is conventional, USDA, FHA or VA may make a difference to your interest rate.  Lately the government loans have had lower interest rates than conventional lending.  I have seen times when that was reversed as well.  Often FHA and VA are the same and more often than not USDA is at the same rate as the other two government loans.

4) Loan to Value:  How much money is put down is a factor as well. Lending is all about risk taking.  A borrower is deemed a better risk if they have more skin in the game so to speak-more to lose-so a loan in which the borrower is putting 20% of their own money into the transaction may have a better rate than one in which the borrower is putting 5% down.

5) Credit Score:  Once again, keeping in mind that lending is about risk taking-lenders know that if a borrower has a lower credit score-something negative has probably happened-whether it is an inconsistent pattern of bill paying, little established credit, or something earth shaking such as a job loss etc. that created the issue.  In any event, the higher the credit score, the better the interest rate as the investor feels more secure in the fact that the money will be repaid.

6)Cash Out: In certain refinance transaction the borrower takes cash out of the equity in the home to pay other bills or finance another endeavor. Once again the borrower is withdrawing some of their stake in the property so the lender may charge a higher rate as the risk of non payment or slow payment has increased.

7) Term of Rate Lock:  Typically interest rates are locked for 30 days.  45 and 60 day locks are also available, but often at a bit higher interest rate.  When a borrower locks an interest rate they are essentially promising to "buy" the money at a particular price.  The investor then guarantees that price for a period of time.  If the transaction doesn't close within that time period and the rate lock expires, the borrower must go back and re-buy the money. In many cases the rate lock can be extended until the transaction can be closed-sometimes there is an additional cost to the borrower. It is dependent on the lender and what the financial markets are doing at the time.  The address of a particular property and an estimated closing date are required to lock an interest rate.  I also want to be relatively certain that I will be the originator of the loan prior to making that rate lock. When I lock and don't have "pull through" on  the loan it creates a situation in which the investor has lost money by tying it up for a transaction that isn't going to happen. There is a consequence all the way down the line.

  So when asked to quote an interest rate and I appear to be slightly wishy-washy, it isn't because I don't want to give a firm quote-but as you can see there are many variables to what the interest rate may eventually be.  Until I know all the variables it is almost impossible for me to be accurate-and-that accuracy is normally only good until the end of the business day.