The Real Deal on Interest Rates

I get calls all the time that go something like, “I’m looking to buy a house and wanted to see what your rates are.”.

If only it was that simple, like going to the grocery store and checking out the fresh produce. Alas, interest rates, or more specifically, the interest rate that applies to your situation, isn’t a one-size-fits-all scenario.

Spoiler alert: It all boils down to risk factors

1. The interest rate you are offered is based on your specific situation. It’s impossible to quote an accurate rate right off the cuff without gathering more info. While most people understand that higher credit scores can equal lower interest rates, most don’t know that the type of property, the way you’ll use that property, and the amount of down payment you are considering also play a critical role.

For example, condominiums tend to have slightly higher rates than detached homes or townhomes. Second homes and investment properties will likely have higher rates than your primary residence.

2. The interest rate you are offered is a function of the risk factors involved for the lender. This concept can be compared loosely to your car insurance. If you have speeding tickets, you can expect to pay more, because you present a higher risk to the company. Likewise, a sports car will often require a higher premium than a minivan, even if they cost the same. That concept can be applied toward the concepts of credit score and property type.

3. Your down payment impacts your interest rate. True story. At times it’s only slight, but the logic follows that the higher your down payment, the more invested you are in the property. The more equity you have in your property, the less likely you are to walk away from it, therefore less risk that the lender will have to go through the painful process of trying to recoup their investment through a foreclosure sale.

4. The type of loan and loan program you qualify for impacts your interest rate. Qualify for a VA loan? Often, VA rates are better than conventional with all other factors being equal. Why? because VA loans are guaranteed by the government, which, as discussed in section #2, significantly reduces risk to the lender.

You’ll get a better rate for a rate term refinance than you will for a cash-out refinance. This goes back to section #3 about how much equity you have, which goes back to section #2 about the risk to the lender. It can all be connected back to risk.

So, when you give me a call, be sure to ask me about rates right off the bat. We’ll have a good laugh before getting to the really important work of discussing your current situation and identifying your goals.