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Understanding The Historically Low Interest Rates | John Stasi | REAL BROKER LLC

Understanding The Historically Low Interest Rates
Understanding The Historically Low Interest Rates
Understanding The Historically Low Interest Rates

Purchasing a home is one of the biggest financial decisions a person can make in their lifetime, and understanding the process of how to obtain that ultimate investment is key. As a homebuyer, one of the most common things you can do is borrow money to purchase the home. However, this can also be one of the most intimidating steps in the home buying process if a buyer is not educated on what a good interest rate is and what its terms mean. One of my jobs as a luxury Realtor®️ is to help my clients understand how the interest rate they obtain works and how it can budget their mortgage payments, potentially saving them a great deal on the cost of their home loan(s). This can be a substantial tool in the money management market to potentially use or reinvest your savings.

What is an Interest Rate?

Let's begin on understanding what an interest rate actually is. Interest rates are typically quoted annually. They are known as an Annual Interest Rate (APR) and take two forms: a nominal interest rate and an effective interest rate. The nominal interest rate does not take into account the compounding period. The compounding period is unpaid mortgage interest that is added to the principal amount of the loan—basically charging interest upon interest. The effective interest rate does take into account the compounding period and thus, is a more accurate measure of interest charges over the term of the loan.

Who Determines Interest Rates & How Do They Work?
Who Determines Interest Rates & How Do They Work?

The Federal Reserve is the authority when it comes to determining interest rates. When it comes to that determination, the Federal Reserve fluctuates these rates based on the state of the economy. For example, "the Fed" lowers interest rates during a period of economic downturn, as we are in right now, in order to stimulate growth. Low interest rates mean more spending money in consumers' pockets to reinvest in the economy and lower money spent on debt—in this case, a home loan. In an emergency effort to boost the economy from a major recession, the Federal Reserve will cut interest rates to zero or near zero, as we are seeing right now. For most qualified home buyers, this determination could mean lower borrowing costs to obtain "more house" for less money. That means they may be willing to make larger purchases, which spurs demand for home fixtures and real estate. When there is too much growth, the Fed can then raise interest rates in order to slow inflation and return growth to more sustainable levels to avoid an overvalued economic market, this known as a market correction.

How Is My Interest Rate Determined For A Mortgage Loan?
How Is My Interest Rate Determined For A Mortgage Loan?
How Is My Interest Rate Determined For A Mortgage Loan?

Your interest rate is typically the product of three major factors: the base rate, the lender’s individual policies and your own credit history. The base rate is set by economic market factors, including the Federal Reserve’s current requirements. Lending policies for consumer interest rates may impact the overall cost of the loan. Most of these factors regarding the terms of the loan are out of your control. However, the most important factor in the stipulations of your loan is your credit score because that IS in your control. Your credit score is a numbered value on your reliability on paying debts owed and day-to-day bills. Good and excellent credit scores tend to get you the best APR offers. Fair credit scores get average offers while poor or bad credit ratings may mean you face high interest rates or can’t get approved for a loan at all. Mortgage APRs include fees such as loan origination fees, taxes and private mortgage insurance (determined by the type of loan or if an insufficient down payment is applied). You can add these fees on to the total amount loan, which will be factored into your monthly payment, or you can pay them separately. If the fees are equated into the loan, it will increase the total amount of money borrowed, thus increasing the APR. Having a close relationship with your Realtor®️ and loan officer who will discuss and explain these terms with you is very important. Finally, the total cost of a mortgage loan also depends on other factors, including how long you finance the property for the overall term of the loan. The longer the term of the loan, the more you will pay over time if all other factors remain the same. On the other side, the shorter the term of the loan, the lower the interest rate you can receive. This will equate to higher monthly payments but a lower total cost. With that being said, a higher interest rate can increase the amount you pay for your home. This is true even if it's over the same time period. A single point in interest can add tens of thousands of dollars in total cost for your home, which is why many people refinance, like we are experiencing now. Also, these point differentials can be major decision makers for consumers to make when deciding on a mortgage. Breaking down percentage points in interest can equate to, depending on the total amount borrowed, saving a couple hundred dollars on your monthly payment. This money saved can be important for reinvesting overall personal capital and wealth.

How Do I Get The Best Interest Rate?

The key aspect to remember is that not all factors determining interest rates are in your control. But, your major contributor is your credit score—something you can control. Before making any big credit purchase, you should consider getting all your financial reports in order. A buyer should seek out their full financial report before combing for any potential properties. Being a fully educated and prepared buyer is the best way to start off a transaction. This makes the process a lot smoother when it comes to going into escrow. A well-qualified Realtor®️ should suggest this to potential clients.

How Do I Calculate My Interest Rate Once It Is Determined?

Typically, your loan officer should go over this information with you. However, your interest rate is generally calculated by dividing the determined interest rate by the number of payments you'll make in the year (remember, interest rates are expressed annually). So, for example, if you're making monthly payments, divide by 12. Then, multiply that number by the balance of your loan, which for the first payment, will be your whole principal amount. If this is helpful please check back for more information on Real Estate and how it effects you and contact me if you are interested in buying or selling your home! -Stasi Sells Vegas ([email protected])

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