I have been advising borrowers in need of residential mortgage financing for over seventeen years. My experience shows that no matter how sharp, smart, clever, educated, or ignorant a borrower is: the mortgage rate trap everyone falls into is the same. Unfortunately, by the time a borrower realizes they have been misinformed, misled, or simply given only part of the mortgage rate story; Your inept, inexperienced, ignorant, and eventually disinterested loan officer/customer service representative has earned an undeserved commission.
How many times do I sit down and answer my phone only to hear “Hi, I was referred by so-and-so, and I’d like to know, uh, what’s your rate today?” My mind races with “Do you have a contract? How much are you looking to borrow? What is the size of your current mortgage? What is the purchase price? How is your credit? Can you verify income? Are you blocking the How long do you want to lock in the rate? When do you want to close? Do you own other properties? Are you buying the property to live in or for an investment? What type of property are you buying? You see, the answer to all these relevant questions (and more) EFFECTS THE RATE!This bears repeating one more time: the answer to all these relevant questions (and more) AFFECTS THE RATE!So, I say to the respective caller while qualifying my answer: “If you have good credit, can verify your income, intend to live in the property, and can show enough liquid assets to purchase the property, then the prevailing mortgage rate is X.”
Please understand that I don’t blame borrowers for asking the question, BUT, I, as a mortgage professional, get frustrated seeing consumers make the most important financial decision of their lives based on misleading ads and other information or lack of her. The trick is that many mortgage companies’ advertisements and customer representatives confuse and/or mislead the consumer into applying for a mortgage with their company while legally and ironically complying with federal laws established by our government to protect the consumer. When do you or the borrower discover that the rate and closing costs are not what they appear to be? IN CLOSURE! The old bait and switch still exists, but even more costly is the retention of relative information. Many mortgage brokers feel they have a better chance of closing your mortgage when they give you a direct answer to your direct question without volunteering the other relevant information you would want to know, if you knew enough about mortgages to ask. This other information used in conjunction with “what is your rate?” question can save you a lot of money at the closing table and over the life of your loan.
There are many variables that go into each and every mortgage agreement, and each agreement is unique to the borrower. I’ll try to give you a general guide to the “other information” to be aware of so you can shop for mortgage rates wisely, and if you so choose, select a mortgage professional who knows what they’re doing who can accordingly. , save you thousands of dollars.
1. Rates fluctuate daily. Some lenders lag the market, and some lenders immediately adjust to the market.
2. A conforming mortgage under Fannie Mae and Freddie Macs; (largest mortgage buyers) underwriting guidelines. Their loan ceilings for 2007 are: 1-family homes $417,000 2-family homes $533,850 3-family homes $645,300 and 4-family homes $801,950. Rates are generally competitive among lenders from one eighth to one quarter rate. Jumbo mortgages exceed conforming ceilings. Jumbo rates are usually higher than conforming rates.
3. Occupancy affects rates. A primary residence is occupied by the borrower. A fee may have an add-on (increase) if the property is a second home, vacation home, or investment property (rental).
4. Loan to Value (LTV) is the amount of the mortgage divided by the value of the property. The higher the LTV, the greater the risk to the lender and the possibility of a higher rate.
5. An all-cash refinance (cash in addition to your existing mortgage) may incur a rate increase depending on the lender.
6. In general, the shorter the loan term (30 years vs. 15 years), the lower the rate.
7. The better the credit, the better the rate. Today, lenders really focus on a credit score. A number determined by comparing your credit pattern and history to the credit bureaus’ database of proprietary mathematical formulas and models of historical consumer credit patterns. If your score is low, you may be eligible to have your credit rescored (legally) to raise your score and therefore give you a chance to get a better rate. Make sure your time frame for getting the money you need matches the time it takes to fix or repair your credit. Otherwise, the time it takes to correct or repair your report may prevent you from taking advantage of current low rates or special offers that defeat the entire purpose (“Bird in the hand…”).
8. Compensating factors affect the spleen. The lender may offer you a lower rate due to a low LTV. An excellent credit score with marginal income may allow you to get a better mortgage rate.
9. Mortgage brokers and lenders have different programs for different types of borrowers. In general, the more financial information you provide, the better the rate. The programs are: Full Income Full Asset Verification, No Income With Asset Verification, No Income Without Asset Verification, and Stated Income With Asset Verification. The key is to make sure you choose the right program so that you not only get the right rate, but also to make sure you don’t get turned away. For example, you apply for a full income full asset loan program, but it doesn’t show the income needed to qualify on your tax return, but you may have qualified for a no income verification type of program.
10. There is, or is supposed to be, a correlation between rates and points. A point is an initial fee of 1% of the loan amount you are applying for. “Rate Down” means paying points to lower your rate. “Buy the rate” means paying fewer points to increase the rate. You most likely want to pay points if: (a) you need to lower your rate to qualify (b) you will own the property long enough to repay (recoup) the money in points you paid up front (c) you have the money additional cash. You most likely don’t want to pay points if: (a) You don’t have the extra money (b) You will own the property for a very short time (c) You think rates are going to drop soon. There are other reasons for paying and not paying points, which should be discussed on a case-by-case basis.
I have saved the best for last!
11. RATE LOCK. When you call and ask “what is your rate?” Typically, you will be quoted the going rate, a/k/a as the floating rate, which means if you’re ready and can close in 15-21 days (meaning you applied for a mortgage, provided your information financial, have a commitment from the lender, an appraisal, a title report, etc.), and you locked in the rate at this time, this is the rate you would get. Now, how many first-time homebuyers do you think fit into that situation, hmmm? Most residential purchase real estate transactions do not realistically fit into a prevailing rate time frame. Most borrowers are not told at the time they are quoted the rate if it is ready to close in 15-21 days. So if rates are going down, fine. BUT, if the rates go up, surprise!
Current rate quotes will always be lower than fixed rate quotes. So, if you’re looking at rates and want to compare apples to apples, when you’re quoted a rate, the key is to make sure to ask, “How long is the rate locked in? Are there any points, origination fees, broker fees? What lock-in time frames are available? More importantly, make sure you can close within that time frame, otherwise you may be subject to extension fees. Usually, the longer it is the lock, the more it costs Lockout periods are typically 15 days, 30 days, 45 days, 90 days, 120 days, 180 days Paying points, increasing the rate, or both adds the cost of the lock. want to ask if a float down option is available (if the rate goes down after you lock in, can you get the lower rate?) More important than getting a fixed rate agreement in writing, make sure the person you are with trying to be honest. , respect able, and whose word means something.
12. The APR (Annual Percentage Rate). I call it Another Proven Scam. A borrower is supposed to receive the APR along with closing costs and rate information. If you look at newspaper ads, you’ll often see an advertised rate that is half to one percent lower than the actual market rate. If you look next to that rate you will see what is known as APR. This advertisement is perfectly legal, as long as the indicated rate is accompanied by the APR, but in reality this is very complicated. Under federal regulation Z, the APR is supposed to be a measure of the true cost of credit, expressed as an annual rate. The government is trying to help you, the consumer, in your lending decisions by having loan providers give you the “true cost of credit” APR. They mean well, but unfortunately, most people don’t have the sophistication, knowledge, time, or financial calculator to calculate the APR. Long story short, by taking the loan amount, the quoted rate, and the closing costs into the calculation, you arrive at the APR. So the rate you see in the newspaper that seems to be lower than everyone else’s doesn’t mean anything unless you know exactly what your closing costs are. In these cases, the APR hides closing costs. You’ll find that most of these below-market advertised prices have several points built into the closing costs. When shopping for a mortgage, instead of comparing APRs, for your sake keep it simple. Find out the rate, how long it’s locked in, and all closing costs included, then shop around. I hope this article helps you save thousands of dollars and good luck to all mortgage buyers.