The Mortgage Rate Shopping Game
I have been advising borrowers in need of residential mortgage financing for over seventeen years. My experience shows that no matter how sharp, clever, intelligent, educated, or ignorant a borrower is: the mortgage rate trap they all fall 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 unearned 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? 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) EFFECTS THE RATE! So, I say to the respective caller while rating 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 watching consumers make the most important financial decision of their lives based on misleading ads and other information or the lack her. The catch is that many mortgage company advertisements and customer representatives mislead and/or mislead the consumer into applying for a mortgage with their company while legally and ironically complying with the federal laws put in place 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 CLOSING! 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 straight answer to your direct question without volunteering the other relevant information you’d want to know, if you knew enough about mortgages to ask. This other information used in conjunction with “what’s 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” you need to be aware of, so you can research mortgage rates wisely and, if you so choose, select a mortgage professional who knows what they’re doing and can, accordingly. , save you thousands of dollars.
1. Rates fluctuate daily. Some lenders lag behind 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. Your 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-fourth rate. “Jumbo” mortgages exceed conforming ceilings. Jumbo rates are typically higher than conforming rates.
3. Occupancy affects rates. A primary residence is occupied by the borrower. A fee can be supplemented (increased), if the property is a second home, a vacation home, or if the property is used for investment (rented).
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. A cash refinance (cash in addition to your current mortgage) may incur a rate increase depending on the lender.
6. In general, the shorter the term of the loan (30 years vs. 15 years), the lower the rate.
7. The better the credit, the better the rate. Today’s lenders really focus on a credit score. A number determined by comparing your credit pattern and history against 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 (legally) re-score your credit to raise your score and therefore give you a chance at a better rate. Make sure your time frame for getting the money you need matches 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 offers that defeat the entire purpose (“Bird in hand…”).
8. Compensating factors affect the spleen. The lender may offer you a lower rate due to a low LTV. An excellent credit rating with marginal income may allow you to obtain 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 No Asset Verification, and Reported 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 make sure you don’t get turned down. For example, you apply for a full income full asset loan program, but don’t show the income needed to qualify on your tax return, but you may have qualified in a type of program with no income verification.
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 request. “Lower fare” means paying points to lower your fare. “Buying the fare” means paying fewer points to increase the fare. You’ll most likely want to pay points if: (a) you need to lower your rate to qualify (b) you’ll own the property long enough to amortize (recover) the money in points you paid up front (c) you have the money additional money. You most likely won’t want to pay points if: (a) You don’t have the extra money (b) You’ll own the property for a very short time (c) You think rates are going to go down soon. There are other reasons to pay and not pay points, which should be discussed on a case-by-case basis.
I’ve saved the best for last!
11. RATE LOCK. When you call and ask “what’s your rate?” you will usually be quoted the prevailing rate, a/k/a as the floating rate, meaning if you are ready and able to close within 15-21 days (meaning you applied for a mortgage, provided your information finance, you have a lender commitment, 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 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 the rate is quoted if they are ready to close in 15-21 days. So if rates are going down, fine. BUT, if 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 you ask, “How long is the rate locked (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. Typically, the longer 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, incorporates 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’re 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’s one-half to one percent lower than the actual market rate. If you look at the side of that rate you will see what is known as APR. This ad 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 the measure of the true cost of credit, expressed as an annual rate. The government is trying to help you, the consumer, with 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, quoted rate, and closing costs into the calculation, you arrive at the APR. So the rate you see in the paper that appears to be lower than everyone else’s doesn’t mean anything unless you know exactly what the closing costs are. In these cases, the APR hides the 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, you keep it simple for good. Find out the rate, how long it’s locked for 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.