All About Interest Rates

Interest rates reflect the cost to borrower money as charged by the Lender. The higher the interest rate the higher the monthly payment (given the same loan terms). Interest rates in the mortgage market tend to be pretty volatile. That means that the interest rate offered on any given day can vary from the previous day. The reason is that the perception of mortgage lending risk and the market value of mortgage investments is affected by the mood of the financial markets (just like the value of the dollar) and therefore rates can change daily or even more frequently. There are laws that protect consumers from usurious (very high) interest rates but reputable lenders such as Allied are well within those parameters.

Interest rates offered can also vary by the type of Loan Program, Loan Terms and the Qualifications of the Borrower. For example Jumbo loans typically include a higher interest rate than a Conforming Conventional or FHA loan. In the case of Loan Terms the shorter the loan period (e.g. 15 years versus 30 the lower the rates could be, but if little to no down payment is made on a home, the interest rate could be higher. And finally in terms of Borrower Qualifications the borrower with better credit may get lower rates. So just because one individual gets a low interest rate does not mean that another person that got a higher rate was taken advantage of.

Lower interest rates shouldn’t always end up being the deciding factor on accepting a loan. For example one could pick a variable rate program because it’s interest rate was lower to start with than a fixed rate loan (e.g. 5.0% versus 5.5%). But since the variable rate loan can increase their interest rate in the future, that same 5.0% loan could be 7.0% or higher in the future depending on the financial markets.

In many cases the Borrower has the ability to “buy down” the interest rate either on a temporary or permanent basis. Obviously the term buy down means that the borrower has to pay for the privilege of a lower rate. In those cases the borrower needs to do their homework to see if the buy down cost versus the monthly payment savings is worthwhile for them to buy down. As a rule of thumb the shorter one plans to stay in the mortgage or home, the less worthwhile buy downs are. But if it will be many years, then the savings overshadows the initial cost.

Sometimes borrowers will choose use a slightly higher interest rate on a loan to cover their up front (closing) costs. To them the initial costs including a down payment are more of a challenge than the monthly payment so they are able to slide the interest rate up a bit to cover their out of pocket costs. For others a quick refinance to take advantage of lower market rates may not utilize the lowest interest rate that is available just so there are no out of pocket costs to conduct the refinance, but they know they will begin saving money right away with the refinance.

“Why is my APR higher than the interest rate that was quoted to me?” APR is the calculated Annual Percentage Rate based on a complex formula. It is not the same as the interest rate you actually pay but it includes the interest rate as part of the calculated number. (The good news is that Mortgage Loans use what is called a Simple Interest rate which means the interest is not Compounded like a credit card is which makes true credit card interest so high. It’s not unusual to see credit card APR’s around 20% or more!) APR includes in its calculations all of the costs of the loan in addition to the interest rate and divides than into the loan amount reduced by the costs. That may not be easy to understand but the end result is that the APR on a mortgage loan is usually always higher than the true interest rate of the loan.

“Why is my APR lower than the interest rate that was quoted to me?”