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Mortgage Questions |
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Question 5. What determines
your interest rate? Interest rates in general are affected on the national level by how stocks and bonds are selling on the stock market. However, for our illustration, we focus on the lender and how they control your rate. Brokers receive, on a daily or weekly basis, "rate sheets" that they use to determine what interest rate to give on your loan. (See discussion in question 3 above.) It's important to understand that each broker has many lending sources, some have hundreds. Obviously the more lending sources a broker has, the more mortgage products he has available to his clients. These "rate sheets" have a "par" interest rate established by each lending source. "Par" means that interest rate is the lowest interest rate the broker can give you for that particular mortgage product.
Remember, the broker is in
the business to make money. In our
example, we will use 5% as a par rate for our example. If the broker gives you a 5% interest rate, he
is not making anything on the loan, except for his origination fee discussed in
a previous question. However, if the
broker quotes you an interest rate of 6% then they earn an added fee on the
"back end" of the loan. It
could be as little as 1/8 of a point or over 2 points. However, brokers are in the business to make
money, not drive their customers away. So,
they strive to give you a competitive rate, but still make money for the time
spent on your loan. Brokers/lenders may
vary a little on the interest rate because they are trying to put together the
best deal for the customer and at the same time make a fair commission for
their work. I want to say this; most mortgage
brokers do put their client first, and give them the lowest interest rate
available. However, as the credit score
goes down, a consumer can expect the interest rate to go up because the lending
source dictates to the broker what rate to give a customer based on what the
customer?s credit score. In addition,
the loan is more difficult to get approved, resulting in the broker spending
more time on the loan. As we said
earlier, the broker charges a higher fee for poorer credit. To get the best
interest rates available in the market and reduce your overall cost on the
loan, your credit scores should be at lease 680 or higher. |
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