• Brett Bonecutter

What is your best rate?

As a Hybrid Agent practicing real estate and mortgage, one of the questions I am asked most often is, "What is your best rate?" I have to hold back a chuckle every time this happens. Let me explain.

First, it is important to understand that every consumer has a range of rates available to them at different costs. It is not as if John Doe is able to get x%, period. No, the reality is that John may choose from a range of rates at different costs.

Second, the range of rates and costs each individual consumer can choose from is adjusted for certain risk factors. The main risk factors are FICO score, amount of equity/down-payment, loan type (FHA, jumbo, conventional, VA, etc), and loan term. For example, if John Doe has a 780 FICO, 50% equity, and is doing a conventional 15 year fixed loan, he may have a range of rates from 2.875% to 4%. But Jane Smith with a 640 FICO and 20% equity may see rates from 3.75% to 4.625% on a 30 year fixed loan. Each range is contingent on an individual's risk factors.

Let's look at what a mortgage loan officer might see after entering John Doe's scenario on a $350,000 loan:

Notice that at 3.375%, the price is "100.00". This is what we refer to as "par," and it is the "going market rate" for John's scenario. That means that at 3.375%, John pays no additional discount points for the rate itself (over and above normal closing costs) AND that there is no credit from the lender. However, if John wants the lowest rate at 2.875%, it is 2.5 "points" under 100 - which translates to a cost of 2.5% of the loan amount ($350,000) at $8750. He can get that rate, but it will cost $8750 in "points" above and beyond his normal closing costs.

But look at the high end of the range. If John took 4%, we would actually be 2.25 points OVER 100 - which means he would get $7875.00 from the lender as a CREDIT towards his closing costs! Why would he want that? Well, maybe he needs money to help cover closing costs and doesn't want to roll them into his loan amount.

The bottomline here is that the "best" rate is in the eye of the beholder. The lowest rate would arguably NOT be best if John only planned to stay in the home for a few years. The difference in payment between 3.375% and 2.875% is about $84/month, but it will cost John $8750 in points... so the rough math is $8750/$84 = 104 months to breakeven! That is almost 8.5 years for that rate to be worth paying for!

Is 2.875% worth it for John? It depends on how long he stays in the loan. If he stays in it for the long haul - or past 8.5 years, then yes, it pencils out. BUT, if John is only going to be in the loan for a few years, he is better off going with a lower cost loan.

Hopefully this isn't too hard to follow. The point is simply this - do not confuse the LOWEST rate with the BEST rate because the LOWEST is almost always the most expensive. I'm here to help with your analysis and education. I want to help you make the most informed decision possible. That is always the BEST decision!

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