You’ve learned a lot so far. At the end of it all, you’re likely still looking to lower that monthly payment. There are two options. Earn favorable adjustments by being a less risky borrower, or pay for discount points upfront.
Loan officers and lenders prefer less risk. If that’s you, you will earn an adjustment on the lender’s going rate, called the par rate, saving you money. Adjustments work both ways, meaning you’ll have a slightly higher rate to offset the lender’s risk in some situations.
Ways to save
Earning favorable adjustments by being a less risky borrower or paying for discount points upfront could pay off when it comes to your mortgage rate.
A conforming loan can save money. Prepare for a higher interest rate for a jumbo loan above the pricing limit. Loans over $1 million carry more risk, so expect a notable adjustment.
Loan to Value
The ratio of your loan to the home’s value is a pricing adjustment factor. The more you put down, the more you shift the burden away from the lender, ultimately helping your rate.
One place your rate can be helped or hurt is your credit score. A FICO score of 740+ will generally qualify for pricing rebates. 680-739 is considered normal and does not help or hurt. Below 680 is when you can expect a higher rate.
Planning on living in your new home full time? You saved yourself money. Buying property as a second home, vacation home, or investment property may add a notable rate increase.
Buying a single family home? You won’t see an increase for choosing this type of property. Condos and multi-family homes tend to earn pricing hits that can up your rate.
Purchasing a new home will usually get you a rebate or adjustment. Refinancing to a better term or rate typically has no cost. Cash out refis earn a pricing hit, however.
Mortgage discount points
Pricing adjustments can influence your rate without handing extra money to your lender, though you may need to make a larger down payment or pay down credit card balances. With discount points, you are buying yourself a lower rate by paying more upfront.
A point is an additional percentage of your loan amount that you agree to pay at closing to lower your interest rate. Each lender’s ratio varies, but generally it is a fraction of a percent off your rate. Whether the added upfront cost is worth it, or financially feasible, it is an individual decision. If you plan to move or refinance in a few years, it may be wise to take a higher rate and skip the points.
Calculating monthly payments
When calculating your monthly payments, you will need: Sale price, loan amount or down payment, and interest rate. The sale or list price will be the total price of the home. The payment calculator needs to know how much of that value will be financed through a lender. The third puzzle piece is your hypothetical interest rate (not APR).
Variables Affect Payments
Once you have a monthly payment baseline, play with these variables to see how they affect your payment: A higher down payment or lower loan amount, and lower interest rate. What is interesting to note, a higher sale price does not always equal a higher monthly payment, and a higher loan amount does not always equal a higher monthly payment.
For example, a $350,000 house with 20% down could snag a rate of 3.7%. Your monthly payment would be $1,297. Let’s say that total price is too high, and you aim for $300,000 with 20% down, but rates have risen to 5.3% for a monthly payment of $1,363.
The bulk of your monthly payment will be the principal and interest you have calculated. There are other fees: Property tax, homeowners insurance, and private mortgage insurance. If you plan to live in a neighborhood with an association, add in HOA and maintenance funds. Not all costs will be part of your mortgage payment, but they must be covered.
Interest rates or APR
Mortgage interest rates come in eighths of a point, meaning the interest rate between 3-4% would look like: 3%, 3.125%, 3.25%, 3.375%, etc. All rates follow this formula. In the case of loan ads, you may see a lender’s annual percentage rate (APR), some may read 3.36% or 3.99%. This is your rate with discount points, closing costs, origination fees and other costs, of thousands of rates offered to thousands of buyers.
Stocks, bonds, and securities
There is a government bond called the 10-year Treasury bond. When stock market investors look for a safe medium-term investment, they may buy these.
Fixed-rate 30-year mortgages are often packaged up and sold on to a secondary market as mortgage-backed securities (MBS). The same investors may also buy these.
Even though mortgages are 30-year loans, the average loan gets paid off (when a home is re-sold) or refinanced within about 10 years. That makes these bonds and mortgage-backed securities similar financial products that compete in the same market.
The economy has a sizable impact on bonds and mortgage rates. Reports on home sales, employment, consumer confidence, and more, give insight into the health of the economy and can easily send rates up or down depending on the news.
When the economy is not doing well, investors tend to sell their stocks and look for a safer investment, like 10-year Treasury bonds. When these are bought up, their prices rise, but their yield (investment return) decrease.
When the economy soars, investors know they can make more money in stocks, so they pass on bonds, making their price drop and yield rise.
The Learning Center is an educational tool and the content is for information purposes only and is not intended to provide investment, legal, tax, or accounting advice, nor is it intended to indicate the availability or applicability of any Ladysmith Federal product or service to your unique circumstances. All examples are hypothetical and for illustrative purposes. Although we have obtained content from sources deemed to be reliable, Ladysmith Federal and its affiliates are not responsible for any content provided by unaffiliated third parties. You may wish to consult an appropriate advisor about your unique situation. The applicability of this information to your circumstances is not guaranteed. You should obtain personal advice from qualified professionals.