The Anatomy of a Rate Quote

There are many variables that go into each and every mortgage deal, and every deal is unique unto the borrower. I will try to provide you with some a general guidelines of the “ Other information” you need to better understand the components of a rate quote, and so that you can appreciate the value, as our clients do (check me out on linked in), of working with a mortgage professional who knows the ins and outs of a real estate transaction and so that you can save thousands of dollars by allowing us to navigate you towards a smooth mortgage financing experience and smooth out the process and lifeblood  and mortgage financing transaction, the lifeblood of a deal what they are doing which may, consequently save you thousands of dollars.

1.Rates fluctuate daily. Some lenders lag behind the market, and some lenders adjust immediately to the market.

2. A conforming mortgage conforms to Fannie Mae and Freddie Macs’ (the biggest purchasers of mortgages) underwriting guidelines. Their 2014 loan ceilings are: 1 family homes $417,000 2 family homes $533,850 3 family homes $645,300 and 4 family homes $801,950. The rates are generally competitive among lenders give or take an eighth to a quarter of a rate. “Jumbo” mortgages exceed the conforming ceilings. Jumbo rates are usually higher than conforming rates.

3. Occupancy affects rates. A primary residence is occupied by the borrower.  A rate may have an add- on (increase), if the property is a second home, vacation home, or if the property is used for 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 greater the risk to the lender, and the possibility of a higher rate.

5. A cash out refinance (cash over and above your existing mortgage) may incur an increase in rate depending on the lender.

6. Generally, the shorter the loan term (30 year vs. 15 year), 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 to the credit bureaus database of proprietary mathematical formulas and models of historical consumer credit patterns. If your score is low, you might be a candidate for rescoring your credit (legally) to bring up your score and consequently 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 the rate. The lender may offer you a lower rate because of a low LTV. A great credit score with borderline income may allow you to squeeze into a better mortgage rate.

9. Mortgage Brokers and Lenders have different programs for different types of borrowers. Generally, the more financial information you supply the better the rate. The programs are Full income Full asset verification,  Stated income with asset verification. The key is to make sure that you match yourself to the right program so you not only get the appropriate rate, but to also make sure you don’t get turned down. E.g. you apply for a full income full asset loan program, but you do not show the income needed to qualify on your tax return, but you may have qualified on a No income verification type of program.

10. There is, or supposed to be, a correlation between rates and points. 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 adds 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.