Freddie Mac reported last week that the average on the 30-year fixed mortgage rose sharply from 3.94% to 4.12%, which according to the National Bureau of Economic Research was the lowest rate ever.
When looking at this rate it is important to remember that it is an AVERAGE rate. If we measured two people, and one person was 5 feet 8 inches tall and weighed 150 pounds and the other person was 6 feet 4 inches tall and weighed 260 pounds, the average height and weight would be six feet and 205 pounds. Clearly, while this average is accurate, it is worthless. The same thing applies to mortgages. Loan amount, purpose and type of a mortgage, loan to value, CREDIT SCORE, etc. are some of the many factors that determine the final interest rate. Two of the loans I closed last month illustrate this perfectly. While both loans were thirty year fixed rate mortgages, one loan was at 3.75% and the other loan was at 4.25%. Which client got a better deal? Both of them. The 3.75% loan was an FHA purchase for $360,000, and the other mortgage was a $200,00 VA refinance. The FHA borrower was not a veteran, and the VA loan was a superior option for the veteran who wanted to refinance over a FHA mortgage.
While the VA borrower could have received a 3.75% mortgage, he wisely figured that paying an additional $4,200 in closing costs to save $58 per month did not make sense. Each borrower had the best mortgage for their unique personal situation. Always remember that rate is irrelevant. Rate PLUS fees are what matters. The annual percentage rate (APR) is defined as a total of all costs imposed on the borrower to obtain a loan. A borrower should always focus on the APR, and not just the rate on the mortgage. When I went shopping last week for new tires, the base price of the tires did not matter. What mattered was the final price I would incur for four tires. The company that had the lowest initial price per tire had the highest price when mounting and balance, disposal of old tires, etc, was included. This reminded me of the sleazy practice of baiting a borrower in with a low rate and then pounding them with fees.
Next week: What is the “Ratchet Effect”?
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