Interest Rates, Advertised Interest Rates, That Is

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Mortgage Interest Rates

Everybody wants the lowest rate they can get, and that makes sense. Most of the time. Depending on closing cost amount, it might not make sense when you plan to have the mortgage for a short period of time.

Lenders advertise low rate all the time.  And some people can get them.  But not all.

In other words, interest rates, all interest rates not just the ones lenders advertise, must be put into a context before they can be compared.

Because lenders’ ideas of what is risky are not the same. A lender might think that the risk a first-time home buyer represents is compensated by adding 0.125% to the rate while another one by adding 0.250%. 

If both advertise 4.25% interest rates, and no other factors came into play (which is not real life, I know, but helps explains), the first lender would quote this first-time home buyer a rate of 4.375% while the second lender would quote 4.500%.

  Adjustments Base Rate Final Rate
Lender 1 0.125% 1st-time buyer 4.250% 4.250+0.125=4.375%
Lender 2 0.250% 1st-time buyer 4.250% 4.250+0.250=4.500%

But the first lender might only add 0.750% for credit scores between 640 and 659 while the second lender adds 0.375%. So, a first-time home buyer with 642 middle score would get a quote of 5.125% from the first lender and 4.875.1255% from the second one.

  Adjutments Base Rate Final Rate
Lender 1

0.1250% 1st-time buyer +

0.750% scores 640-659

or 0.875% total

4.250% 4.250+0.875=5.125%
Lender 2

0.2500% 1st-time buyer +

0.375% scores 640-659

or 0.625% total

4.250% 4.250+0.625=4.875%

A non-first-time home buyer with a middle score of 642 would get 5.000% from the first lender and 4.600% from the second.

  Adjustments Base Rate Final Rate
Lender 1 0.750 for credit 640-659 4.250% 4.250+0.750=5.000%
Lender 2 0.375 for credit 640-659 4.250%

4.250+.0375=4.625%

Conclusion

The advertised rate is a base rate, the rate given under the perfect circumstances. The rate people get is usually different… sometimes by much.