Reasons why mortgage rates are not all the same
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By Scott Sheldon  August 10, 2012 12:00 am

Are you purchasing a home or refinancing a mortgage? Now is a fantastic time to consider taking out a home loan. Mortgage rates are still at ridiculous lows and home affordability has never been more attractive. The question everybody asks when getting a mortgage is “what interest rate am I going to get or what is your rate?”

While the mortgage interest rate is certainly important, a better question to ask would be what mortgage loan program makes the most sense for me? Let me explain.

Mortgage rates vary across the board; there is no one-size-fits-all interest rate.

When buying a home, refinancing a home, doing a remodel or whatever your goals, for securing mortgage loan financing, the best question to ask your mortgage lender is what mortgage loan program is the most suitable for me? Asking this question does a few things for the mortgage lender to actually give you the mortgage rate:

• Lets the lender know upfront that you want at least a few choices on loan programs which are important depending on your goals;

• Lets the lender qualify you for more than one loan program, giving you the full picture as to your best-suited loan program;

• Lets the lender quote you an interest rate that’s attainable;

• Gives the lender your full story so they can give you an accurate mortgage interest rate quote.

The most important component here is suitability. For example, if you are trying to refinance your home and have equity, and you’re looking for a payment reduction only, a loan containing mortgage insurance might not be the best possible loan program, and a more standard conventional loan might be best suitable.

*Mortgage tip: besides the fact interest rates are changing from program to  program, there is another underlying component to all of this, Fannie Mae and Freddie Mac “conven

tional loans” are always going to be priced differently than government loans, and unique programs such as the HARP 2 are also priced much differently than interest rates you’ll see on the Internet, on TV and in the news.

Here is a typical scenario we deal with on a daily basis:
Homeowner A is looking to refinance his mortgage, he has a loan amount of $300,000 left on his current loan, has a debt to income ratio of 36 percent, his mid credit scores is 740 and home valuation is $600,000, giving him a nice loan to value at 50 percent.  He calls a local mortgage lender, and they offer him 3.875 percent with no points on a 30-year fixed-rate mortgage.
Homeowner B is also looking to refinance his mortgage and his loan amount is $250,000, his debt to income ratio is 45 percent, and his middle credit score is 720. Unfortunately, he is over 100 percent financed on his home. While he qualifies to refinance on the HARP 2 Refi Program, his loan to value is 150 percent. After speaking with a local mortgage lender, he is quoted 4.25 percent on a 30-year fixed loan with no points.

So why the disparity in interest rate? Notice the changes in the credit characteristics:

• Change in credit score – 740 vs. 720: mortgage lender prices these loans differently based on the higher Fico Score;

• Change in loan to value – 50 percent equity vs. being underwater by 150 percent: Mortgage lender prices interest rate based on risk characteristics the secondary market has an appetite for;

• Change in debt to income ratio: Homeowner B has a higher credit risk file based on credit score, loan to value and the monthly debt load is significant.

Other changes that commonly affect interest rates when comparing mortgage loans include occupancy, PMI Mortgage Insurance, loan program, loan purpose, property type, lock term, loan term, amount of financed properties, credit challenge and monthly escrows. The big four factors lenders use to look at in providing an accurate mortgage rate include the evaluation of  credit, debt, income and assets and the mother lode factor “loan program.”

You will see a change in mortgage rates depending on the loan program most suitable for your situation. The single biggest variance in mortgage rates is the loan program. Here’s why: Government loans, including FHA loans and USDA loans, are usually priced more aggressively and competitively than standard conventional 30-year fixed rate mortgages.

Simply, these loan programs are more attractive to investors in the secondary market, and they reward consumers with lower mortgage rates on these home loan types.

Government loans are more profitable than the secondary mortgage market. Unlike traditional vanilla 30-year fixed-rate mortgages, these programs have additional premiums built into the financing to make these loans inherently more profitable to the investors on Wall Street. It’s very likely you’ll be able to get a better interest rate on a government loan than on the standard conventional loan, but that comes at a cost. The cost is…paying PMI.

That government loan with the more attractive interest rate will actually be a “higher cost loan” than a conventional loan without mortgage insurance. For example, on a $300,000 loan amount, if the loan is a government loan such as an FHA program, you’ll have your monthly principal and interest payment plus a monthly mortgage insurance premium of $312.50 per month.
If you were able to secure a conventional loan without mortgage insurance, while the interest rate might be .375 higher in rate, the payment will be lower and the total cost of the money would be less.

Case in point – just last week we had a client secure a purchase loan to buy their first home and they’re getting an interest rate on a USDA loan of 3.75 percent with no points. Coincidentally, their friends, who are also doing a mortgage loan with us, which happens to be a refinance, are getting an interest rate of 4.25 percent on a 30-year fixed without points.

Our other clients wanted to understand why their friends were getting 3.75 percent when they were getting 4.25 percent, and we had to explain that there were several different factors, such as the ones listed above. One was a purchase transaction, one was a refinance transaction, one was a standard conventional loan without mortgage insurance, and one was a government loan.

So when you’re comparing home loans and/or looking for a mortgage rate quote during your mortgage shopping phase, make sure your mortgage lender knows the full story upfront and can actually qualify you for the suitable loan program that would make the most sense for your situation. Then, get an interest rate quote to match the program you qualify for best.

If you’re thinking about purchasing or refinancing a property in Sonoma County, a primary residence, a second home or investment property, and you would like a free mortgage rate quote, fill out our easy online form today. You’ll see why mortgage rates are not all the same.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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