How Multi-Decade Highs Are Changing The Way Mortgage Rates Are Quoted

At this point “high rates” are old news. We were already close to hitting the highest levels in more than 20 years last week, so it wasn’t a huge surprise to achieve that dubious distinction this Thursday. Some sources see the record-breaking rate at 7.09% for a 30yr fixed while others are over 7.5%. Both are accurate and we’ll explain why. To understand why, we first need to remember that a mortgage rate quote is not as simple as the rate itself.  The rate that almost everyone refers to (officially the “note rate”) is only part of the equation.  While the note rate dictates the amount of interest paid with each mortgage payment, it doesn’t account for all the interest the average borrower pays. For instance, several of the closing costs seen on almost every mortgage are considered “prepaid finance charges.”  Essentially, that’s just interest paid upfront. But what if the mortgage in question has “lender paid closing costs.”  Or what if a builder offers a closing cost credit?  You’ve heard that there’s no such thing as a free lunch and the same is true here.  Whether it’s coming out of your pocket, or from the lender, the same amount of money will be paid to the same parties. So what’s the difference then?  Wouldn’t it always be better to get those upfront costs paid by someone else? The catch here is that the money that a lender can pay toward your closing costs is determined by your interest rate.  The higher your rate, the more of your upfront costs a lender could pay.  This is the first key reason that a rate of 7.09% could be the same as a rate of 7.5% if one of them includes upfront costs and the other one doesn’t.
Source: mortgagenewsdaily.comNew feed