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Market Interest
Rates
When applying
for a loan, most home buyers lock into an interest rate for a 30 day
period. This allows the buyer to purchase a home at any time in that
period for a set interest rate. To the average home buyer, it appears that
interest rates do not change often.
Yet interest
rates change daily. That’s because money is a commodity that is bought,
sold and traded in the world’s major markets. Every day, wholesale lenders
provide interest rate information, via fax and the Internet, to retail
lenders and mortgage brokers. To compensate for these changing interest
rates, retail lenders and mortgage brokers then adjust the points or
origination fees they charge for loans.
For example, let’s say that
on Monday your mortgage broker lists interest rates 7.5 percent for a
30-year fixed rate loan. To achieve this rate, the mortgage broker pays a
1 percent fee on the loan amount to the wholesale lender. This fee is
passed on to you as part of the cost of the loan. On Tuesday, the interest
rate for the home buyer remains at 7.5 percent for the same loan. However,
because of fluctuating market rates, the mortgage broker now has to pay a
loan fee of 1 - _ percent, which is again passed on to you. And on
Wednesday, the home buyer is once again offered a 7.5 percent loan, but
the mortgage broker pays a 1 -1/8 percent loan fee to compensate for
market rates.
This, in a
very simplified format, is how interest rates and fees are calculated.
Now, let’s look at ways to find below-market financing. |
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Below-Market
Financing
Here are some
ways to obtain below-market financing. For this example, let’s assume that
we’re using a 30-year fixed-rate mortgage and that the lender is not
requiring the buyer or the seller to pay any up-front points for
fees.
Seller Pays – The more money that is paid
up-front to the lender, the lower the interest rate will be. In a seller
pay situations, the seller pays any points or loan origination fees on
behalf of the buyer so the buyer can get a lower interest rate. One point
equals 1 percent of the loan amount. On a $200,000 loan where the seller
pays two points toward the loan, at closing the seller would receive
$4,000 less in order to pay the lender to give you financing at a lower
market rate.
Shorter Loan Terms
– Lenders typically charge lower interest rates on shorter loans, for
example 15-year loans compared to 30-year loans.
Adjustable Rate Loans – Another way to reduce
interest rates is to get an adjustable rate loan rather than a fixed rate
loan. Adjustable rate loans change the amount of interest they charge at
pre-set intervals and generally charge a lower starting rate than a fixed
rate loan. Any adjustments to the interest rate are based on the market
rate at the time. Adjustable rate loans can change interest rates every
six months, every year, or every three, five, seven or 10 years. The more
frequently the rate is adjusted, the lower the starting interest
rate.
Owner Financing – If you can find a seller
willing to finance the purchase, you can offer them any interest rate you
choose. Owner financing occurs when the seller owns the property outright
without an existing mortgage.
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