I have been advising borrowers who need residential mortgage financing for over seventeen years. My experience shows that no matter how sharp, smart, smart, educated, or ignorant a borrower is: the mortgage rate trap everyone falls into is the same. Unfortunately, when the borrower realizes that he has been misinformed, cheated, or has only been given part of the mortgage rate history; Your inept, inexperienced, unknowable, and eventually disinterested loan officer/customer service representative has earned an undeserved commission.
How many times do I sit down and answer my phone just to hear “Hello, I was referred from time to time, and I would like to know, what is your rate today?” My mind competes with “Are you on contract? How much do you want 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 rate? How? How long do you want to set the rate? When do you want to close? Do you own any other property? Are you buying the property to live or for an investment? What type of property are you buying? “, the answer to all these pertinent questions (and more) THE RATE EFFECTS!
This warrants repeating once more: the answer to all relevant questions (and more) RATE EFFECT! So, I say to the caller while rating my answer, “If you have good credit, you can verify your income, you intend to live on the property, and you can show enough liquid assets to buy the property at the current mortgage rate is X. ”
Please understand that I do not blame borrowers for asking the question, BUT I, as a mortgage professional, am frustrated to see consumers making the most important financial decision of their life based on misleading ads and other information or lack of them. The trick is that the ads from many mortgage companies and customer representatives confuse and/or trick the consumer into applying for a mortgage with their company while ironically and legally complying with federal laws set by our government to protect the consumer.
When do you or the borrower discover that the closing rate and costs are not what they seemed to be – ON CLOSING! The old bait and switch still exist, but even more expensive is the retention of relative information. Many mortgage officials feel that they are more likely to close their mortgage when they give you a direct answer to your direct question without volunteering the other pertinent information you would like to know if you knew enough about mortgages to ask. This other information is used in conjunction with “what is your rate?” The 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 will try to provide you with a general guide to the “other information” you need to know so that you can shop for mortgage rates wisely and if you so choose select a mortgage professional who knows what they are doing, which can consequently save you thousands of dollars.
Guide To Buying a Mortgage Rate Set
1. Rates fluctuate daily. Some lenders lag behind the market, and some lenders immediately adjust to the market.
2. A mortgage conforming to Fannie Mae and Freddie Mac; (largest mortgage buyers) underwriting guidelines. Its maximum loan limits for 2007 are: 1 family houses $ 417,000, 2 family houses $ 533,850, 3 family houses $ 645,300, and 4 family houses $ 801,950. The rates are generally competitive with lenders giving or taking from one eighth to one-quarter of the rate. Jumbo mortgages exceed compliant ceilings. Jumbo rates are generally higher than compliance rates.
3. Occupancy affects rates. A primary residence is occupied by the borrower. A fee may have a supplement (increase), if the property is a second home, vacation home, or if the property is used for investment (you rent it).
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 withdrawal refinances (cash on top of your existing mortgage) may incur a rate increase depending on the lender.
6. Generally, 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 are really focused on a credit score. A number determined by comparing your credit pattern and history with the credit bureau database of proprietary mathematical formulas and models of historical consumer credit patterns. If your score is low, you may be a candidate to requalify your credit (legally) to increase your score and consequently give you a chance to get a better score. Make sure that 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 frustrating all-purpose specials (“A Bird in Your Hand …”).
8. Compensatory factors affect the rate. The lender may offer you a lower rate due to low LTV. An excellent credit score with limited income can allow you to obtain a better mortgage interest 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 Declared Income with Asset Verification. The key is to make sure it matches the correct schedule so that you not only get the right rate but also to make sure it’s not declined. For example, you apply for a full income full asset loan program, but do not show the income needed to qualify on your tax return, but you may have qualified in a type of verification program with no income.
10. There is or is supposed to be, a correlation between rates and points. One point is an initial fee of 1% of the loan amount you are borrowing. “Lowering the rate” means paying points to lower your rate. “Buying the rate” means paying fewer points to increase the rate. You will most likely want to pay points if: (a) you need to reduce the rate to qualify (b) you will own the property long enough to amortize (recover) the money in points you paid in advance (c) you have the extra cash. Chances are, you don’t want to pay points if: (a) you don’t have the extra money (b) you own the property for a very short time (c) you think rates will drop soon. There are other reasons for paying and not paying points, which must be discussed on a case-by-case basis.
I have saved the best for last!
11. LOCK THE RATE. When you call and ask “what is your rate?” You will generally be quoted at the prevailing rate, aka as a variable rate, meaning that if you are ready and can close within 15-21 days (meaning you have applied for a mortgage, you provided your financial information, you have a lender pledge, an appraisal, a title report, etc.), and now you’re locked into the rate, 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 really conform to a current time frame. Most borrowers are not informed, at the time the rate is quoted, about whether it is ready to close within 15 to 21 days. So if rates are falling, that’s fine. BUT, if rates are increasing, surprise!
The current rate quotes will always be lower than those locked in the rate quotes. So if you are buying fares and want to compare apples to apples, when you are quoted a fare, the key is to make sure to ask: “How long is the fare locked (protected)? Is there any point, origination fees What broker fees are available? “More importantly, make sure you can close within that time period, otherwise you may be subject to extension fees. In general, the longer the lock, the more it costs.
Blocking periods are generally 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 might want to ask if a float down option is available (if the rate goes down after the lock, you can get the lower rate). More important than getting a written rate lock deal, make sure the person you are dealing with is honest, reputable, and whose word means something.
12. The APR (annual percentage rate). I call it another proven mortgage scam. The borrower is supposed to receive the APR along with closing costs and rate information. If you look in the newspaper adds, you will often see an advertised rate of about 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 announcement is perfectly legal, as long as the indicated rate is accompanied by the APR rate, but in reality, this is very complicated. Under federal regulation Z, APR is assumed to be the measure of the true cost of credit, expressed as an annual rate.
The government is trying to help you, the consumer, in your loan decisions by getting loan providers to give you the “real cost of credit” of the APR. They have good intentions, but unfortunately, most people don’t have the sophistication, knowledge, time, or financial calculator to calculate APR. Simply put, by taking the loan amount, the rate you are quoted, and taking closing costs into account in the calculation, reaches the APR rate. 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 the closing costs are.
In these cases, the APR hides the closing costs. You will discover that most of these advertised below market rates have multiple points built into the closing costs. When you buy mortgages, instead of comparing APRs, for your sake, it’s easy. Find out the rate, how long it’s locked, and all closing costs included, and then shop around. I hope this article helps you save thousands of dollars and good luck to all mortgage buyers.