Interest Rates in the 4's?? - Lesson #1

Happy New Year! As we usher in a brand New Year, interest rates have fallen dramatically over the past month and many of you have already refinanced into historically low rates. Over the past month, however, we have learned some valuable lessons we would like to share with you in the “new lending environment”. As you investigate what will arguably be your largest financial decisions in 2009 (possibly refinancing) here are some lessons from the “front lines”. The first is that you shouldn’t believe everything that you read in the media or hear from your friends about interest rates. All I have heard for the past month is that interest rates are in the 4’s. While we have had a few brief periods where rates dropped slightly below 5%, you have to understand that it doesn’t necessarily apply to you. In the new world of mortgage lending, your interest rate is determined by a multitude of factors including credit score, how much equity you have in your home, whether or not you have 2nd mortgage or home equity line, the size of your loan (larger loans command better interest rates) etc…..And then the most important question is whether or not you are paying a loan origination fee or loan discount points. If you are willing to pay “points” either in the form of origination fees or discount points, you will receive a lower rate. But that doesn’t necessarily mean that it makes sense. The more money you spend in closing costs to get that lower rate, the longer the “payback period” (time it takes to recapture those up front costs with the monthly savings you will achieve). Be careful of advertising…they are always quoting ridiculously low rates to get the phone ringing (but you have to pay points to get those rates)….this type advertising drives me crazy!! Most of the time, it will not make sense to spend money on upfront points to get a lower rate. Be sure and educate yourself on the differences!