Quoting Mortgage Rates

With record low mortgage rates upon us I thought it would be wise to discuss what goes into quoting mortgage rates. More specifically some of the assumptions that lenders, banks and brokers use in quoting these rates. Do not take anything for granted when market rates are at 5.5% and you overheard a lender quoting 4.875% then something is wrong and you should read the fine print.

#1) Locking Term: Typically when quoting rates most lenders use 7-15 day locks! This means that if you want a 30, 45 or 60 day lock your rate will be higher. Why? Because you are locking in today's rates for a future period in time and lenders must hedge their money to cover your lock. Longer locks are available (i.e. 180 day locks) however out-of-pocket expenses typically accompany such a lock. Why? Again because banks what you to close your loan with them and to ensure this they charge a locking discount which is refunded once your loan is closed.

#2) Escrow Account: Lenders assume that you will want your taxes and insurance included in your payment when they are quoting rates. If you would like an "escrow waiver" then a higher rate may apply. Why? Because when you don't escrow the lender loses money and in turn charges the broker or banker .25% to waive escrow. Why does the bank lose money? When you make escrow payments the lender takes this extra money and invests it. In turn they earn income on "your" money while they wait to pay your taxes and insurance. Therefore when they don't have this extra money to invest they do not have the income it produces.

#3) Loan Amount: Most lenders assume a loan amount of at least $130,000 when quoting rates. Why? Because the larger the loan amount the more interest the lender can collect and this translates to a better rate. For instance a person borrowing $55,000 will not get the "advertised" rates because the banks will take a .50%-1.25% rate hit for this loan size. Why? Again banks will not earn very much interest on a loan size of $55K and therefore will charge a higher rate to make up the difference.

#4) Credit Score: Effective November of 2007' lenders now hit borrowers with sub 700 credit scores. Meaning someone with a 660 score will get a slightly higher rate than someone with a 720 score, regardless of the fact that it is a Fannie Mae loan.

#5) Loan-to-Value: Lenders assume that the client will have at least 5% equity in a refinance transaction or 5% down payment on a purchase transaction. What does this mean? If you need 100% financing the rates being quoted will not apply to your particular situation!

#6) Documentation: Most rates being quoted are assuming that the client can document income via taxes, W2's, pay stubs and asset statements. Therefore if "other" documentation is being provided a slightly higher rate may apply.

#7) Collateral: Most rates advertised are assuming the property is a single family "stick built" primary residence. Therefore if you have a client purchasing an investor 2 or 4 unit property their rate will differ from the advertised rate.

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