Interest rates are almost always offered in increments of 1/8th or .125, with 1 minor exception. (1) When you see advertised rates – or even a rate listed on a bank or lending website – you will often see odd numbers (i.e. not in increments of .125) and that is because what is being shown or emphasized is likely the APR, not the Interest Rate, and that can be very misleading. What you are not seeing is the actual cost of paying the points required for the rate shown.
On the rate sheet below, the “no points” rate is 6.625%, so for a rate of 6.625% you would just pay the normal closing costs, which would be about about $3700, with $0 in points. For any lower rate, you would need to pay the cost of the discount points shown, in addition to the closing costs.
It would be legal to advertise 5.957, which upon first look seems like a great rate – it looks a LOT better than 6.625%! Only when you dig in, possibly after completing a full loan application and getting an official quote, would you see that you are paying almost $20,000 in points in addition to the closing costs of $3700.
When you do have both a rate and an APR, a very telling factor will be the gap between the two. You can see in the chart below that the 6.625 rate, which costs $0 in points, has an APR of 6.672 and the gap between the 2 is very small at .047. However the 5.500 rate, which costs $19,125 in points, has an APR of 5.957 and the gap is much larger, at .457, almost 10x greater. So examining the gap between the rate and the APR provides a lot of valuable information when the closing costs aren’t listed. The bigger the gap, the more points you are paying. We like to see the gap be less than .250 and closer to .125 to indicate a lower level of closing costs.
On the chart below, a rate of 6.250 costs 1.125, with an APR of 6.339, and the gap is 1.66, which would be a more typical quote.
If you have a rate quote that seems to good to be true – call us. We’d be happy to take a look and make sure you aren’t missing something important!
(1) Sometimes lenders will offer rates rounded to the .49 or .99, as in 6.99 instead of 7.00, or 6.49 instead of 6.50. The .49 or .99 sounds a little better, but is essentially the same thing as .50 or .00.