Mortgage Interest Rates
An Interest Rate is a fee that is paid by the borrower to a mortgage lender as recompense for borrowing money for your home financing. Interest is typically paid in the form of a percentage rate and is collected on the unpaid principle balance. Interest continues throughout the life of the loan.
Whether you refinance your current home, if you are a first time home buyer, or you are purchasing a second home or investment property, you will work with a mortgage lender to apply for your mortgage. The core component of the total mortgage loan value is the principle (amount you need to purchase or refinance) and the second component is the interest.
The Interest Rate is a good indicator on the cost of borrowing, but it isn't the only indicator. You should also consider the following aspects:
Annual Percentage Rate (APR)
The Annual Percentage Rate is a better way of determining the total cost of a loan than its basic interest rate. The APR includes the additional fees that a simple interest rate may ignore. The APR % is most often slightly higher than your standard interest rate.
What Can Affect Interest Rates?
A number of other factors can impact your mortgage interest rate that you should be aware of. Ask your Poli Mortgage Loan Officer for additional information as this is an important piece prior to Locking your interest rate.
Discount Points/Origination Points
Discount Points are different than Origination Points. One Discount Point is 1% of the Principle Balance; a borrower pays "discount" upfront as pre-paid finance on the loan. Paying Discount Points will reduce your interest rate and generally Discount Points you pay are tax deductible (check with your CPA). One (1) point is fee based and is equal to 1% of the loan amount. As an example, paying one point on a $300,000 home loan is 1% or $3,000. This is a onetime fee.
An Origination Point is also 1% of the loan amount, however, it is not used to buy down the interest rate.
Type of Loan Product (Fixed vs.Adjustable)
The interest rate will vary from product type to product type, and different loan terms (# of months or years) offering lower interest rates on some products while there may be a higher interest rate on other products.
- Interest Rate Lock Timeframe: Once you are ready to lock your loan, the time period that you lock for, typically 30 days, 45 days, or 60 days, can impact the interest rate. The shorter duration locks, such as 30 days, most often can allow for a lower rate.
- Credit Score: If your credit score is considered low (under 680), your interest rate may be impacted and would be higher than another with a higher rate such as 780.
- Loan Amount: A loan for $417,000 or greater (this value differs by region) is considered a Jumbo Loan. Most Jumbo Loan products have a slightly higher interest rate than lower value loans.
- Loan to Value (LTV): The loan to value ratio is calculated by dividing your loan amount by your appraised value. For example: Loan = $300,000 / Value = $400,000 = 75% Loan to Value or LTV. Essentially, your LTV is a percentage of the appraised value of your home against the value of the home you are refinancing or purchasing. The higher your LTV, the higher the interest rate may be.
- Closing Costs: Paying for some or all of the closing cost items could help reduce your interest rate.