Interest Rates - A 30,000 Feet View

Interest rates have been on the rise since the beginning of the year, and at this point they will continue to increase for the foreseeable future.?Interest rates are affecting everyone, plain and simple, so I wanted to take the time over the next few weeks to explain how interest rates work.

I am going to mainly focus on mortgage rates, but I think the information provided is pertinent to all loan types.?Now, I am not a licensed loan officer, but after serving over 1,300 clients since 2015, I like to say I know a thing or two.?

Not to oversimplify, but interest rates are used by all lenders, as a way to mitigate risk, and frankly, to pay the bills.?Many factors are used to dictate the rate of a loan; however, the two following factors weigh heavily.?

1.) RISK - The higher the rate, the riskier your loan is probably going to be, i.e., second homes, lesser credit scores, investment properties, jumbo loans, hard money loans, etc.?All come with higher risk, so therefore they come with a higher interest rate. This is also why loans with no collateral, Personal Loans for example, carry a higher rate and why loans in a junior lien position will see a higher rate, as well.?For example, Home Equity Lines of Credit (HELOCs) have a higher rate, because they are usually in a second lien position, and goodness forbid, if you were to fail to pay and fall into foreclosure, the junior lien position loan would usually need to settle for pennies on the dollar.?The lenders simply charge a higher rate to offset their risk. Seems simple enough, but why do the rates vary so greatly from lender to lender??One word, #overhead…

2.) OVERHEAD - Overhead, or operating expenses, refer to expenses associated with running a business. They are the expenses the business incurs to stay in business, regardless of its success level.?Overhead is going to vary drastically from lender to lender. All expenses are offset from an income generating source and for all lenders that is the interest rate.?In fact, did you know??The largest source of income for all lenders (including banks and credit unions) is the interest they receive from loans.?

Therefore, in this unprecedented market, I cannot overstate the importance of shopping for a lender to ensure you get the best pricing, terms, service and rates.?We have a duty to serve our community and whether that lender is a friend or not, we should never withhold from our neighbors.?

If you want to get an incredible option to compete in this market, one of our amazing preferred lenders, Philip Chavez at Central Bank & Trust will gladly compete: [email protected] or (719) 761-8410.?