Market Insights

Changes in Rates: How Important Are They?

Man showing what his mortgage rate is, how they change, and why they are important

If you are planning to buy a home in the near future, you may be concerned by talk of rising interest rates. Perhaps you worry that the higher rates will force you to settle for less than your ideal home or may even affect your ability to buy a home. But just how important are interest rates? How closely should you follow them as you start the home buying process?

 

Should Interest Rates Be Considered When Choosing between Lenders?

 

If you are shopping around for a lender, you may see different advertised interest rates. Before you start comparison shopping based on these numbers, consider the following:


Most differences in mortgage rates will be minimal, usually one-eighth or one-quarter of a percentage point. This difference will not have a significant impact on your monthly payments. Although your rate and monthly payment is most certainly a large factor in which lender you choose, it is also important to focus on the level of service they can provide. You should look at how knowledgeable they are on new laws and regulations regarding home loans and ask about the speed of the process before making your final decision. Being delayed several months in closing
may ultimately be more detrimental than paying a fraction of a point in rate.


In many cases, the advertised rate is not what you will be paying. It may be the best rate that is offered, while the actual rate will be affected by the specific loan program you choose, your credit and other factors.

 

Where Should You Focus?

 

Of course, Annual Percentage Rate (APR) matters and is one of the most important drivers of the monthly payment.  But, when shopping for a lender, you should also focus on quality service. Here are some things to evaluate when choosing your lender.

 

–        The lender’s reputation

–        Ability to provide guidance for a smooth transaction

–        Other costs, such as points, fees and APR (see below)

 

Points

 

Points, often known as discount points, are defined as interest that is prepaid to the lender at closing, which generally reduces the interest rate and lowers the monthly payment. Generally, one point is equal to one percent of the loan amount. For instance, on a $200,000 loan, you would pay $2,000 to reduce the interest rate by one percentage point.

 

Fees

 

You may have to pay other fees to process the loan. Some of them are standard, such as title insurance and appraisal fees, while others may vary by lender. All lenders are required to provide what is known as a “good faith estimate” or a document that includes the interest rate, lender fees, title charges, pre-paid interest and mortgage insurance. Although this document only provides an estimate, it allows you to compare lenders and their anticipated costs associated with getting a mortgage.

Annual Percentage Rate (APR)

 

The APR includes discount points, lender fees and mortgage insurance, if required. It will be slightly higher than the nominal interest rate for a loan, in most cases.

 

The Forecast for Interest Rates                     

                   

According to the Mortgage Bankers Association, mortgage rates are expected to gradually rise from 4.5% in the first quarter of 2014 to 5.0% by the fourth quarter, a total increase of a one-half point. This is for a 30-year fixed rate mortgage. For buyers, this means that on a $200,000 loan, they will pay about $60 more per month, a relatively small impact to the home’s affordability.

 

When applying for a home loan, it’s important to look at every aspect. While interest rates are important to consider, finding a reputable lender with high-quality service and in-depth knowledge is essential.

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