How Mortgage Rates Work

Okay, Matt the Mortgage Guy here recording a quick video to talk about how mortgage interest rates work. Now, before I get started, if you're watching this on YouTube, if you like this straightforward mortgage content that I'm creating, please consider subscribing to the channel. If you find value, smash the like button. More people can see it. More people can get value from it. So without further ado, smash the like button. Let's get started. What I'm looking at on my screen is a rate sheet. And what people don't understand about interest rates is they call a mortgage broker or mortgage advisor and they say, Hey, Matt, I'm looking to do refinance. Here's how much I owe. Here's what my house is worth. Here's my credit score is what's my rate. Now, the answer to that question, what's my rate is whatever you want it to be to a certain degree, right? Because what happens is as mortgage professionals and as a broker, like myself, I've got 60 different letters to choose from. I plug your stuff in and out. They spit a rate and it's all digital for most of the mortgage companies nowadays where I get to look at my screen and I can see 2.5, 2, 6, 2, 5, 2, 7, 5, 2.8, 1, 2.8, 7, 5. And you can have any of those rates you want. Different rates come at a different cost. And so that's where consumers get confused where they say, Hey, somebody sent me a mailer and they offered me a 2.625. Why are you talking to me? If Matt about 2.81, that's because that lower rate with that other company has got a little thing in it called points. If you don't know what points are, it's basically a charge that you pay to, to lower the interest rate. So if somebody says, Hey, that costs one point for that rate, one point equals 1%. If you've got a $400,000 mortgage, it's $4,000. If it's one point and that's how mortgage rates work. If you want the two and a half percent on a 30 year fixed, it's available. It's going to cost you in this scenario that I, that I have on my screen a little less than a point 0.87, nine of a point $3,516 to go down to 2.5. And what you want to consider and talk through with a mortgage advisor is, Hey, Matt, I'm looking at it. My principal and interest is 1580 at the two and a half percent. It's about 1660 at 2.875. Should I pay this $3,500 for that $80 in savings? Well, if you're talking to me, I'd say, let's look 3,600 bucks divided by $80 in savings takes 45 months to break even. If you plan on staying in the house for more than four years, if so, maybe it makes sense. You also got to think about the future value of money and all that stuff, but it's really preference. And really you as a consumer have the choice. What generally happens is when these rate sheets are created, you get steered towards, um, they call it best execution sometimes, but the par interest rate where you don't pay any points can be, um, can be the best rate in most circumstances, because as you get farther and farther from that, it's like the law of diminishing returns where one eighth cost you a quarter point. The next eight cost you a half a point. The next eight costs you three quarters of a point. And so, you know, sure on certain scenarios, you can be a full percentage point better than you would at par. But if you had to pay four points for it, it wouldn't make sense. It would take a long time to recover. So hopefully that makes sense. Hopefully it wasn't too technical. I'm going to provide a screenshot somewhere in this video. So you can kind of see exactly what we're talking about. Um, and just to add on with how these rate sheets work, as you go higher in rate, you'll actually get rates that provide a rebate. So instead of saying you're going to pay a point to get this rate, I can show you 2.875 on the scenario I'm looking at where you actually get a quarter of a point in lender credit. And what that lender credit does, it's going to help pay for, um, title costs, lender fees, the setting up of your escrow accounts, whatever charges are rolled in there, this lender credit will offset that. So the lender credit usually is something that's, that's used when you're purchasing a house. Cause if you don't have as much capital, you say, Hey, I got to take a higher rate and take some lender credit, um, versus paying to take a lower rate. So hopefully that clears it up a little bit. It's something that a lot of folks don't know. I go through explaining it when I've got folks who, who I work with. So that's that if you're in California, you'd like to reach out and chat anything, mortgage, get it, get some, um, free, honest advice. Feel free to reach out to me the best way to do that. Matt at Matthew mortgage guy.com. If you're out of state and looking for mortgage advice and want me to refer you to somebody I like and trust, um, feel free to send an email to the same email address and I'll connect you there until next time. Thanks.