Understanding Mortgage Interest Rates to Avoid Mortgage Fraud

One of the most confusing and overlooked areas of buying a house is understanding the interest rate you are paying on your mortgage. The reason for this is that buyers do not spend time checking the interest rate quote or obtaining multiple mortgage rates from banks and brokers. Many buyers in this market assume because they have a great credit rating and high FICO score that their mortgage broker or bank will automatically give them the lowest rate possible. Unfortunately, this is rarely ever the case. When you are purchasing a house or refinancing you must remember “Caveat Emptor”, buyer beware.

Most people are so excited when they are buying a new house they don’t really shop for the best mortgage or mortgage rate. Here are a few things you need to understand in order to obtain the best rate possible.

How much mortgage can you actually afford?

I like to keep the total mortgage, homeowners’ insurance, and property taxes under 32% of your monthly income. However, depending on your other debt some mortgage companies let you go closer to 50%.

Put down 20% on your house so you can avoid Private Mortgage Insurance “PMI”. PMI is required when you buy a house and put down less than 20%. The purpose of this insurance is to protect the lender in case you default on the loan.

Determine what type of loan you can afford. With today’s low rates it is hard to think of a reason why someone would finance with anything other than a fixed rate loan over a term of 15, 20 or 30 years.

How are mortgage rates calculated?

Most mortgage rates can be calculated based on the 10-year treasury rate. The bank determines what the 10-year treasury rate is and then calculates cost and profit above that rate to price their mortgages. A rule of thumb is a 30-year fixed-rate mortgage should be anywhere from 150 to 200 basis points above the 10-year treasury rate.

The 10-year treasury rate can be found on the Federal Reserve’s website utilizing this link: https://www.federalreserve.gov/releases/h15/

Here is a graph that compares the 30-year fixed rate to the 10-year treasury rate.

A good place to check these rates is bankrate.com.

You need to understand the difference between Annual Percentage Rate “APR” and your mortgage  interest rate.

The interest rate on your loan (in nominal terms) is the rate used to calculate your monthly payments.

The more important rate to understand is the Annual Percentage Rate “APR”. This is the true rate including all the costs and fees, such as broker fees, origination fees and other expenses.

When you are comparing loans, you should compare the APR rate.

Once you have a chosen a loan make sure you calculate and compare 15 year, to 20 year to 30 year mortgages.

Also be aware of unscrupulous banks and mortgage companies changing the terms of your original loan at closing. There has been a tremendous amount of fraud in this area in the last 20 years; especially back in the early 2000’s.