Average Interest Rate

September 30th, 2009

I get a lot of excited questions based on information people see on the latest average interest rate news. This data is usually published monthly by the media, so it is a regular source of misleading data.

It is a compilation of a lot of different interest rate quotes and variables, that do not apply to everyone’s exact situation. Also, it is a national average figure, with interest rate quotes from across the country that may not apply locally, and many times also includes interest rate quotes with points. But most consumers do loans with 0 points. Hence, the numbers you see on TV or in the newspaper always looks artificially low.

Example

For example, if in compiling the average interest rate figures one bank quotes 4.5% with 3 points, and another 5.125% w/ 0, and another 4.75% w/ 1.75 points, the media may report an average interest rate of 4.93%. They never explain that there are points involved. They also never explain that rates are priced differently state to state and region to region. And rates are different based on if the loan is a purchase or a refinance, and based on the loan size, the property type, your credit score, etc.

What makes it so confusing?

When these figures are released I get a flurry of phone calls telling me that rates have dropped. Then I step through and explain that the 4.93% quote they see does not apply to their \$850,000 loan amount, because an \$850,000 loan is considered a Jumbo loan which carries higher rates. And the numbers seen publicly are an average based on Conforming loan amounts (which are \$417,000 and under). Also, average interest rates only apply to single family homes, if you are getting a loan on a condo or a multifamily home, rates are higher for those property types than for single family homes.

Credit scores matter

Or I may get a call from a client who sees that the average interest rate is 4.93%, and angrily wants to know why their rate was recently locked in at 5.25%. And one of many explanations may be that they have a 667 credit score, which requires a higher interest rate. The numbers seen with generalized rate quotes require the very highest credit scores, which are 740 or more for a Conventional loan.

So, when you see an average interest rate figure, it’s hard to rely on that to know what your rate quote should be.

The media, as usual, is long on hype and short on details, when they report the news. And, as usual, before you believe what you see, don’t assume it is true and do your own research before acting on it.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.