“Mike, I keep hearing about low 4.5% rates, but every time I call a lender the rate they quote is higher! What’s up?” How Your Rate Is Determined, Part 2
Last week we discussed how your location and your credit score can impact the interest rate you pay. This week we look at two more factors, both of which can be even more critical that the first two.
Specific Loan Scenario – So, we’ve already adjusted your rate for where you live and what your credit score is. Now, let’s get into the more complex “hits” and “add ons” and look at how your specific loan scenario can impact the rate you pay:
· Purpose of loan – purchasing a home is the least risky loan and will always have the “base” rate. Refinancing your current first mortgage increases the cost, and including a second mortgage in the payoff or pulling additional cash out of your home to consolidate debt sends the cost exponentially higher. The chart below shows the "add ons" and "hit" for a refinance loan. If you have a 700 FICO (remember, you have perfect credit at this level!), and want to borrow up to 80% of your home’s value lenders will add approximately .875% to your cost – that’s $1,750 on a $200,000 loan and is in addition to the “hits” you may have already incurred for your location and your Credit Score.
· Property Type – borrowing against your principal residence is always the least expensive. Borrowing against an investment (rental) home adds approximately 1.75% to 3% of the loan amount to the cost.
· And on and on… If you go back to Part 1, you can see the master “add on” chart from a national lender. If you look closely you’ll notice I haven’t listed ALL the possible “hits” or “add ons.” In addition, other lenders may have more factors to consider.
The factors to this point are what I call “static” factors – they are specific to your credit profile and the characteristics of your loan request. They remain the same whether you talk to me today or next week. The next factor, Timing, is the one that drives you (and I) crazy because it makes obtaining a rate quote a moving target.
Timing – can be everything. Timing is the reason I say “you can cost yourself a ton of money by shopping around for the ‘best’ rate.” The market forces that impact mortgage interest rates are moving 24/7 and lenders can, and do, change rates throughout the day. Below is a rate change notice sent by one of my lenders. You'll note they changed rates TWICE in one day for a total of .25%
A “normal” mid-day rate change is .25% of the loan amount which is $500 on a $200,000 loan. One “normal” rate change of .25% and you’ve erased two days of effort to shop for a lender with lower fees.
Keep in mind that by the time the lender issues the rate change it’s too late to LOCK at the previous terms. You could get a rate quote from a lender and that quote could be invalid minutes later.
If the cost can change .25% or more in one DAY, how much do you imagine it can change from day to day or week to week? This is why calling multiple lenders over the course of a couple of days can actually cost you money. You could spend 2-3 days calling different lenders gathering invalid quotes (based upon the fact those lenders can’t possibly know enough about you or your circumstances to apply the correct “hits”). You decide you think you know who has the “best” rate and you call them back on the 4th day to apply – oops! – the cost has increased .50% over the last three days and your “best rate” lender is now offering you a rate that is worse than the “worst rate” lender you spoke to three days ago!
So…you think you’ve found the lender you want to use because you like their rate quote. But wait! Can they LOCK in the rate they just quoted you? Or are you still subject to market changes? The rate you pay on your loan is not determined until your lender LOCKS your loan.
Many lenders require your loan to be approved before they can lock the rate – and this subjects you to a couple more weeks of rate changes while they process your file. We have the ability to LOCK the terms for you right over the phone, with just a few pieces of personal information.
If there is any inside info about lending or real estate you’ve been curious about, please send an email to MMullin@TheLoanConsultant.com, or give me a call at 509-252-9151. I’m passionate about real estate and mortgage lending, and would be happy to share my knowledge with you!