Since mortgage lenders don’t have a single rate for the loans they offer, they use a mortgage rate sheet to determine the interest rate they will ultimately charge a borrower.
Each type of loan has several rates that vary continuously based on market conditions and underlying borrowing costs.
Understanding how the mortgage rate sheet works may help you to avoid an unpleasant surprise when your loan comes through.
1. Understand discount points.
Discount points are fees paid to the mortgage broker or lender in return for getting a lower interest rate. These points or fees are due at signing and are typically 1 percentage point of the total loan amount.
Discount points are used by the lender to offset the cost of offering you a lower-priced loan that may be harder for them to sell.
Why would someone choose to pay upfront for a lower interest rate? Well, there are two likely reasons.
First, they need a lower interest rate in order to lower the monthly payment and qualify for the loan. Second, they plan to stay in the home for a long enough period of time to make the initial cost worthwhile.
2. Identify the loan type and term.
When you’re looking at a mortgage rate sheet, there will be heading for the program and term of the loans in the sheet.
The program is the type of loan (Conventional, ARM, FHA, Jumbo) and the term is the length of time for the loan. Find your program and term and then compare them.
The rate sheet will show a range of rates for each program and the costs or points associated with each rate.
It will also show the length of time for the “lock period” or the length of time the rate can be locked in. Typically the shorter the lock period is, the cheaper the rate.
“The more you understand,
the better off you will be.”
3. Understanding adjustments
The reason there are different rates listed in the mortgage rate sheets has to do with adjustments that are assigned for the program. Adjustments are what the lender uses to offset risk.
Typical adjustments include:
- Size of the loan
- Your credit score
- Property type
- High loan to value ratio
A lower credit score rating will have a higher price adjustment.
4. Your specific situation
As is always the case, your situation will determine the type of mortgage program, the terms you get, the points or cost of the loan and the adjustments you’ll have to pay.
It’s a complex process, but one that’s made easier by understanding in advance what you are up against.
When talking with a lender or mortgage broker, the more you understand about their rate-setting process, the better off you will be.
Don’t be afraid to ask questions and make sure you understand the process as they explain it to you. That’s the way to make sure you get the best mortgage rate for your situation.
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