|Key factors that drive up the cost of your mortgage
Applying for a mortgage? Do your fees and rates appear to be a little higher than what you see advertised? If yes, there could be several key factors driving up the cost of your mortgage that you may not know about.
These additional mortgage pricing characteristics can make your mortgage cost more. Don’t be fooled by a lower-priced mortgage offer if your financial picture contains any of the key cost drivers.
Credit score importance
Most lenders have an impeccable credit threshold at 740 or above. If your middle credit score is under 740, even 739, you could be paying slightly more in terms of interest rate and/or associated costs with your new mortgage application. Your credit history may not support raising your score by virtue of opening up new credit or paying off debts, sometimes your best score just becomes a daily byproduct of how you manage liabilities.
This one is a biggie, particularly in conventional mortgages, loans not insured by the Federal Housing Administration, U.S. Department of Agriculture or U.S. Department of Veterans Affairs. The cream of the crop conventional loans can become very pricey with less than 25 percent equity and a lower credit score, particularly so in the circumstance of your score being sub 700.
If you are financing a property that is not your primary residence, such as an income property/investment property, expect to pay more right out of the gate, no matter what your loan-to-value or your credit score. It’s not uncommon to see as much as .375 percent higher in rate for income property financing combined with these other risk factors.
Believe it are not, if you were to take a loan with great credit, say 740 or above, on a primary home transaction with 25 percent equity with a loan amount at $160,000 alternatively compared to a loan amount at $200,000, the loan amount at $200,000 would be more competitively priced. Contrary to popular belief, mortgage giants Fannie Mae and Freddie Mac have an appetite for bigger mortgages, usually at $170,000 or more than they do for loans under $170,000 and as such, price these loans slightly more as the interest collected is below their servicing margins (servicing meaning collecting monthly payments).
Freddie Mac loans are the only loans on the conventional side (non-government) that allow for the use of a cosigner or even a non-occupying co-borrower to help offset a mortgage payment. Freddie Mac loans inherently price their loans a bit more than Fannie Mae loans, but offer this loophole.
Time frame delays
Interest rate lock extension due to time delays, if not handled in a timely manner, can be a strong driver of cost. Lock extension fees can be as much as .375 percent of the loan amount, using a $400,000 loan that’s an additional $1,500 for an extra 30 day period of time, expect half that amount for a shorter delay. Lock extensions typically can be for 15 days, or 30 days with most lenders. Want to avoid a time frame delay? If a lender conditions for a pay stub or a bank statement get it to them quickly.
On a given trading day, the following scenarios will always yield the best possible combination of rate and fees:
• Middle FICO score of 740 or higher: Ideal barometer of credit lenders go by.
• LTV (loan to value) 70 percent or lower: More equity and/or down payment at 30 percent yields substantially reduced pricing adjustments to rate and fees.
• Occupancy – primary residence: Owner occupied and second home transactions are the lowest cost mortgage types available. A second home is also classified as a vacation home.
Reducing rates and fees
Ideally, there are two biggest factors to pay attention to in reducing your rates and fees associated with your mortgage financing cash and credit. First is managing credit. A qualified mortgage professional with experience should be able to help you manage your liabilities in order to reduce your mortgage costs.
Perhaps it might mean paying off in full or paying down credit cards or even opening up new credit.
Secondly, cash is still king even lending as well as real estate. Paying down your principal balance to an appropriate loan-to-value can easily shave off hundreds of thousands of dollars in unnecessary interest by taking an interest rate and loan program that is not necessarily ideal.
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.