Market Interest Rates

When applying for a loan, most home buyers lock into an interest rate for a 30 day period. This allows the buyer to purchase a home at any time in that period for a set interest rate. To the average home buyer, it appears that interest rates do not change often.

Yet interest rates change daily. That's because money is a commodity that is bought, sold and traded in the world's major markets. Every day, wholesale lenders provide interest rate information, via fax and the Internet, to retail lenders and mortgage brokers. To compensate for these changing interest rates, retail lenders and mortgage brokers then adjust the points or origination fees they charge for loans.

For example, let's say that on Monday your mortgage broker lists interest rates 7.5 percent for a 30-year fixed rate loan. To achieve this rate, the mortgage broker pays a 1 percent fee on the loan amount to the wholesale lender. This fee is passed on to you as part of the cost of the loan. On Tuesday, the interest rate for the home buyer remains at 7.5 percent for the same loan. However, because of fluctuating market rates, the mortgage broker now has to pay a loan fee of 1 - _ percent, which is again passed on to you. And on Wednesday, the home buyer is once again offered a 7.5 percent loan, but the mortgage broker pays a 1 -1/8 percent loan fee to compensate for market rates.

This, in a very simplified format, is how interest rates and fees are calculated. Now, let's look at ways to find below-market financing.

Below-Market Financing

Here are some ways to obtain below-market financing. For this example, let's assume that we're using a 30-year fixed-rate mortgage and that the lender is not requiring the buyer or the seller to pay any up-front points for fees.

Seller Pays - The more money that is paid up-front to the lender, the lower the interest rate will be. In a seller pay situations, the seller pays any points or loan origination fees on behalf of the buyer so the buyer can get a lower interest rate. One point equals 1 percent of the loan amount. On a $200,000 loan where the seller pays two points toward the loan, at closing the seller would receive $4,000 less in order to pay the lender to give you financing at a lower market rate.

Shorter Loan Terms - Lenders typically charge lower interest rates on shorter loans, for example 15-year loans compared to 30-year loans.

Adjustable Rate Loans - Another way to reduce interest rates is to get an adjustable rate loan rather than a fixed rate loan. Adjustable rate loans change the amount of interest they charge at pre-set intervals and generally charge a lower starting rate than a fixed rate loan. Any adjustments to the interest rate are based on the market rate at the time. Adjustable rate loans can change interest rates every six months, every year, or every three, five, seven or 10 years. The more frequently the rate is adjusted, the lower the starting interest rate.

Owner Financing - If you can find a seller willing to finance the purchase, you can offer them any interest rate you choose. Owner financing occurs when the seller owns the property outright without an existing mortgage.

How you choose to finance your home is up to you and is a very personal decision. What is right for one person may not be right for someone else. Explore your options and find a financing situation you are comfortable with.

I'd be happy to assist you as you investigate financing options and search for a new home. Please call me and we can look into ways to find below-market financing for your home.