Do you want the best rate? Of course you do, but it would help you to know that the “best rate” is relative to your unique financial situation, and that there are many variables that go into each and every mortgage deal. The helpful guidelines below will help you better understand the components of a rate quote and the effects on pricing.
When you call and ask what your rate is, you will generally get quoted the prevailing rate, aka 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. 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” time frame. Therefore, if rates are dropping, fine. But, if rates are increasing (like they are now)—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 is the rate 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 or 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).
- Mortgage rates fluctuate daily. Some lenders lag behind the market, and some lenders adjust immediately to the market. Important to note: Credit score, loan to value (LTV), occupancy, transaction and loan amount must always be looked at together to arrive at the best rate estimate.
- 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 underwriting guideline box. Their 2017 loan ceilings are:one-family homes $427,100, two-family homes $543,000, three-family homes $656,350 and four-family homes $815,650. “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.
- 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).
- Loan to value (LTV) is the mortgage amount divided by the value of the property. The higher the LTV the higher the rate. Once you put less than 20 percent down the rate and payment generally go up.
- Cash out refinances (cash over and above your existing mortgage) may incur a rate increase depending on LTV and credit score.
- Generally, the shorter the loan term (30 year vs. 15 year), the lower the rate.
- Credit score: As you know, the higher your credit score, the better the rate. 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…”).
- Compensating factors affect rate. A low LTV may get you a better rate and offset a lower credit score.
- There is, or is supposed to be, a correlation between rates and points (now known as origination fees). A point is an up-front fee of one percent 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.
- The APR (annual percentage rate) is supposed to be the measure of the true cost of credit, expressed as a yearly rate. 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, and the rate you are quoted, and factoring closing costs into the calculation, you arrive at the APR. 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 into the closing costs. When mortgage shopping, instead of comparing APRs, keep it simple. Find out the rate, how long it’s locked in for, and all closing costs included and then compare.
- Last but not least, time: Please be cognizant of time. When you shop around and make your million calls to different lenders telling them you are looking for “the lowest rate,” you are also losing time and risking a possibility that the rate quoted to you will be higher, especially in this current market. Making sure the person you’re dealing with is honest and reputable can save you shopping time and prevent you from losing a quarter of a rate to save an eighth.
By Carl Guzman
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.