Or, Why a mortgage is not just about a rate
There are many variables that go into each and every mortgage deal, and every deal is unique unto the borrower. The helpful guidelines below will help you better understand the components of a rate quote and the effects on pricing.
1. Mortgage rates fluctuate daily. Some lenders lag behind the market, and some lenders adjust immediately to the market. Important to note: credit score, LTV, occupancy, transaction, and loan amount must always be looked at together to arrive at the best rate estimate.
2. A conforming mortgage conforms to Fannie Mae and Freddie Macs’ (the biggest purchasers of mortgages) guidelines. They generally have the best rates if you fit into their box. Their 2015 loan ceilings are: 1 family homes $417,000 2 family homes $533,850 3 family homes $645,300 and 4 family homes $801,950. “Jumbo” mortgages, High balance or standard, exceed the above conforming ceiling and are usually priced higher than conforming rates. There are also, VA Loans, FHA loans, reverse mortgages.
3. Occupancy - A primary residence is occupied by the borrower. There may be price “adjustments,” if the property is a second home, vacation home, or investment (you rent it out).
4. Loan to value (LTV) is the mortgage amount divided by the value of the property. The higher the LTV the higher the rate.
5. A cash out refinance (cash over and above your existing mortgage) may incur a rate increase depending LTV and credit score.
6. Generally, the shorter the loan term (30 year vs. 15 year), the lower the rate.
7. 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, a rescoring option should be investigated (legally) to bring up your score and give you an opportunity for a better rate. Make sure that your time frame for getting the money you need coincides with the time it takes to correct 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 deals which defeats the whole purpose (“A bird in the hand…”).
8. Compensating factors affect rate. A low LTV may get you a better rate and offset a lower credit score.
9. There are different programs for different types of borrowers. The more financial information you supply the better the rate. The key is to make sure that you have your financial paperwork as complete as possible especially if you are self-employed.
10. There is, or supposed to be, a correlation between rates and points (now known as origination fees). A point is an up-front fee of 1% of the loan amount you are borrowing. “Buying down the rate” means paying points to lower your rate. ”Buying up the rate” means, paying fewer points to increase the rate. You would most likely want to pay points if: (a) you need to lower the rate to qualify (b) you will own the property long enough to amortize (recapture) the point money you paid up front (c) You have the extra cash. You will most likely not 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 decline shortly. 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. LOCKING THE RATE. When you call and ask “what is your rate”? You will generally get quoted the prevailing rate, a/k/a as the floating rate, which means, if you are ready and able to close within 15-21 days (which means you have applied for a mortgage, supplied your financial information, have a commitment from the lender, an appraisal, a title report, etc.), and you locked in the rate right now, this is the rate you would get. Now, how many first time homebuyers do you think fit that situation, Hmmm? Most residential purchase real estate transactions do not realistically fit a prevailing rate time frame. Most borrowers are not informed, at the time they are quoted the rate, about the if you are ready to close in 15-21 days closing time frame. Therefore, if rates are dropping, fine. BUT, if rates are increasing – Surprise!
Prevailing rate quotes will always be lower than locked in rate quotes. So, if you are rate shopping and want to compare apples to apples, when you are quoted a rate, the key thing is to make sure you ask: How long the rate is locked in (protected) for? 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. Generally, the longer the lock the more it costs. Lock in periods are usually 15 days, 30 days, 45 days, 90 days, 120 days, 180 days. Paying points, increasing the rate, or both, incorporates the cost of the lock. You may want to ask if a float down option is available (if the rate drops after you lock can you get the lower rate.) More importantly than getting a rate lock agreement in writing, make sure the person you’ re dealing with is honest, reputable, and whose word means something.
12. The APR (Annual percentage rate). I call it Another Proven Rip-off. A borrower is supposed to be given the APR along with the closing costs and rate information. If you look in the newspaper ads you will often see a rate advertised about one half to one percent lower than the real market rate. If you look on the side of that rate you will see what is known as the APR. This advertisement is perfectly legal, as long as the rate stated is accompanied by the APR rate, but in reality this is very tricky. According to the federal regulation Z, the APR is supposed to be the measure of the true cost of credit, expressed as a yearly rate. The government is trying to assist you, the consumer, in your loan decisions by making loan providers give you the APR “true cost of credit.” They mean well, but, unfortunately, most people do not have the sophistication, knowledge, time or financial calculator needed to figure out the APR. Long story short, by taking the loan amount, the rate you are quoted, and factoring closing costs into the calculation you arrive at the APR. So the rate you see in the newspaper that appears to be lower than everyone else means nothing unless you know exactly what the closing costs are. In these cases, the APR conceals the closing costs. You will find out that most of these advertised below market rates have several points built in to the closing costs. When mortgage shopping, instead of comparing APR’s, for your sake keeps it simple. Find out the rate, how long it’s locked in for, and all closing costs included and then compare.
I hope this article helps you save thousands of dollars and good luck to all mortgage shoppers.
Carl E. Guzman, CPA, is the President and founder of Greenback Capital Mortgage Corp. a Mortgage Broker/Banker in New York, New Jersey and Florida, celebrating over 25 years of assisting borrowers with their financing needs. He is a CPA by training and a Licensed Real Estate Broker in New York and New Jersey specializing in complex residential and commercial mortgage solutions.