Why the Interest Rate You See Online is NOT the One You’ll Get

Did an interest rate catch your attention the last time you were looking online?  Did it look a lot better than rates you’ve seen on other sites? Maybe you’ve been thinking about buying a home, buying an investment property, refinancing, or getting a line of credit, 

However, it’s very rare that the interest rate you see online will be the one you get from a lender.

There are many factors that determine the interest rate any of us receive. Here’s a great rundown for you or anyone you know planning on getting a mortgage or refinancing.

How Interest Rates Work

Let’s cover the basics first. Interest rates for mortgages can fluctuate on a daily basis, going up or down.

Freddie Mac posts the average U.S. rate for popular mortgages every Thursday after surveying lenders across the country. These are the rates that you’ll see or hear about in news media reports, especially when the 30-year fixed rate hits a record low.

Lenders Want Your Business

Mortgage lenders promote their own interest rates on their websites. However, what you see isn’t necessarily the one you’ll get.

Usually these “promo” rates are really an average of rates that they offer, and you’ll need to read the fine print to find out any restrictions or requirements. Most lenders offer several mortgage products, some better (less costly) than others.

What Impacts Your Rate

Here’s a breakdown of the variables a lender will consider:

Credit Score – Your score and credit history play a huge role in what rate you’ll be offered. It lets lenders know if you’re a good risk or not as a borrower. A high score of 740 or more means you’ll get a lower rate since you’ve proved you’ve handled credit responsibly in the past. Even if your score is considered “good”, which would be anything above 700, you’ll still get a higher interest rate than if it’s not 740 or above.

So, the lower your credit score, the higher the interest rate. Lenders view borrowers with lower scores as less credit worthy.  If your credit score is lower, there are things you can do to improve it. Give me a call to get started.

Down payment – There are different rates depending on how much you put down. The larger your down payment, the lower the interest rate because the loan is deemed less risky to the lender. A lender views your loan more positively if there is more equity in your home. To qualify for some of the best mortgage rates, you need to be able to put down 20%. If you put 25% down, you get an even lower rate.

If you have less than 20% down, your interest rate will be slightly higher and you might also have to add private mortgage insurance (PMI) to your monthly mortgage payment. However, don’t let this stop you from buying a home! You don’t need 20% down to buy a home. You can buy a home with as little as 3% down and get a perfectly good rate.

Type of Property – Did you know that condos have slightly higher interest rates then single-family detached homes? A condo loan could be .125% to .375% higher since lenders view condos as more risky since they’ll be dealing with owners other than you and your homeowner’s association as well. 

Different Products – The interest rate also depends on the mortgage product. There are jumbo loans, FHA loans, VA loans, adjustable rate loans, and conventional loans — all of which have different rates, fees and requirements.

Loan Term – Usually loans with a shorter term have lower rates. A 15-year fixed rate loan will typically be lower than a 30-year fixed.  ARMs (adjustable rate mortgages), which have become popular because of improved regulations, will have an even lower interest rate for a temporary period.

Loan Size – Larger loans usually have higher interest rates. If you need to borrow more, the loan is considered riskier. Jumbo loans also require larger down payments. This is not always the case. Sometimes Jumbo loan rates are lower! Go figure. My best lenders can work with you to find the best combination of loan(s) and down payment to get you the best rates for homes in the jumbo loan range.

Bonus Secret — APR!

Want to know the easiest way to compare rates offered by lenders?  It’s called an APR, which stands for Annual Percentage Rate.

It includes any fees incurred for the cost of obtaining the loan.  Closing costs, any points, and an origination fee are used to come up with the APR, along with the actual mortgage rate you’re offered.

This APR number reflects the true cost of the loan. It will be a higher rate than the interest rate alone. Here’s where you really need to look at the details (and fine print) to see what each lender is actually offering so you are comparing apples to apples.

For example, a lender may offer a low interest rate but will charge 2 points. Or the lender may offer you a higher interest rate with no points. How do you know which is best or the “cheapest” money to borrow? Just look at the APR. It might even be the offer with the higher interest rate. It has the lower APR since the lender is not charging you for any points.

Beware of inquiring with an unknown lender

As you can see, your rate can be much higher than what is advertised out in the world. So, don’t troll for rates on the internet and inquire with unknown lenders, or even the big banks. The rate you see is not what you’ll get. You might get sucked into a site that pays for leads. You’ll get pestered with calls and never-ending emails from who-knows-where. If you’ve accidentally done this, ask the person on the line where they are located. Ask how many loans they’ve personally closed in the Puget Sound area.

Good rates are available with good local lenders. What determines the rate is not the lender, but the factors above. I’ve worked with many fabulous local lenders who offer great rates AND great service, which you need more than you know. I’m happy to send you a list of good lenders, and can introduce you. Send me a few good lenders.

Don’t be intimidated – there is a loan for you!

Whether you’re looking at upsizing, downsizing or buying your first home, you need a good lender and the best rate possible. The more time we have to review all the factors that go into determining your rate, the more time you have to prepare and gather options. The best time for to discuss buying a home is 6 months to 1 year before you actually want to buy. I’m happy to have a preliminary conversation anytime over a coffee or a cocktail. I’d also be happy to take a second look at any estimates you get from lenders or help you compare options.  I’d love to help!