Why the Interest Rate You See Online Isn’t the One You’ll Get

Did an interest rate catch your eye while browsing online? Whether you’re thinking about buying a home, an investment property, refinancing, or getting a line of credit, it’s rare that the rate you see online will be the one you actually receive from a lender.

Many factors determine the interest rate you’ll be offered. Here’s a helpful guide for anyone planning to get a mortgage or refinance.

How Interest Rates Work

Let’s start with the basics: mortgage interest rates fluctuate daily. Freddie Mac posts the U.S. average rate for popular mortgage products every Thursday after surveying lenders nationwide. These rates often make the news, especially when the 30-year fixed rate hits a new low.

Lenders Want Your Business

Mortgage lenders promote interest rates on their websites, but what you see isn’t always what you’ll get. These “promo” rates are often averages, with fine print detailing restrictions or conditions. Most lenders offer a variety of mortgage products, some more affordable than others.

What Impacts Your Rate

Here’s a breakdown of factors that affect your rate:

• Credit Score: Your credit score plays a significant role in the rate you’re offered. A score of 740 or higher gets you a lower rate since it shows responsible credit use. Even a “good” score above 700 could mean a slightly higher rate if it’s below 740. The lower your score, the higher the rate, as lenders see you as a higher risk.
• Down Payment: The more you put down, the lower your interest rate. A larger down payment reduces the lender’s risk. For the best rates, you’ll need to put down 20%, and putting down 25% can get you an even better rate. Less than 20% down means a higher rate and possibly private mortgage insurance (PMI).
• Type of Property: Condos and townhomes tend to have higher interest rates than single-family homes, typically by 0.125% to 0.375%. Lenders view condos and townhomes as riskier because they involve other owners and homeowner associations.
• Different Products: Mortgage products come with different rates and requirements. Jumbo, FHA, VA, adjustable-rate, and conventional loans all have unique terms and costs.
• Loan Term: Shorter loan terms usually come with lower rates. A 15-year fixed loan has a lower rate than a 30-year fixed, and adjustable-rate mortgages (ARMs) can offer even lower rates.
• Loan Size: Larger loans, especially jumbo loans, generally come with higher rates and require larger down payments.

As you can see, there are a lot of factors can make the interest rate you qualify for higher than the one you see advertised. It’s important to know what to expect to avoid sticker shock.

Bonus Tip: Understand APR!

The easiest way to compare lenders is by looking at the APR (Annual Percentage Rate), which includes the loan’s interest rate, fees, closing costs, points, and other costs. The APR gives you the true cost of borrowing, often higher than the interest rate alone. When comparing lenders, check the APR to ensure you’re making an apples-to-apples comparison.

For example, one lender might offer a lower interest rate but charge 2 points, while another offers a higher rate with no points. The lender with the higher rate could still have a lower APR, making it a better deal.

If you have questions about interest rates or need help comparing estimates from lenders, feel free to reach out! I’m happy to assist—just email me. I’d love to help you explore your options.