It’s frustrating! You read the headlines, “Mortgage rates lowest in 60 years!” Then, you call the lender and the rate quoted is higher than what you‘ve seen online. You wonder, “What’s going on here?”
There are a lot of reasons that the rates you are being quoted may not be as low as the rates you see advertised. Here are a few of them:
1) They aren’t real. A lot of internet rates are not honest quotes. And, those that are may already be expired or may have have conditions on them that only a tiny fraction of borrowers can meet.
2) You have to pay discount points. Fannie Mae and Freddie Mac Weekly rate surveys show rates from the previous week and will likely require you to pay discount points. On a recent Freddie Mac rate survey, the rate on a 30 year fixed rate mortgage was 4.10%. But, further in the article it stated that the 30 year fixed rate mortgage carried an average of 0.8% of a discount point. A discount of 1.0% (1 Point) can be a 0.125% - 0.500% difference on the interest rate.
3) Your credit score isn’t high enough. Fannie Mae & Freddie Mac have Loan Level Pricing Adjustments (Click here for my blog article on LLPAs). If your interest rate Is below 740 and your Loan to Value Ratio (LTV) is greater than 80% there will be adjustments to your interest rate. For example, if your middle credit score is 700 and your LTV is 75.01% - 80.00%, there will be a loan level pricing adjustment of 0.75%. This is an additional fee (points) that will have to be paid with your mortgage. Since most people do not pay points on their mortgage, this will result in a higher interest rate.
4) Your loan isn’t large enough. The rates you see listed are often for very large loan amounts. Larger loan amounts provide more revenue but don’t cost more to originate than smaller loans, so the lenders can make the same or more profit, even at a lower interest rate.
5) You are in the wrong area. Some lenders have different rates for different geographic areas of the country. This may be due to higher default rates in certain areas or higher costs to originate loans in those areas.
6) You have more than one loan. If you have subordinate financing on your transaction (either purchase or refinance) there may be LLPAs as a result. For example, if you are buying a house with an 80/10/10 (80% LTV on the first mortgage, 10% on the second mortgage and a 10% down payment) there is an LLPA of 1.0% on this transaction. This could result in a rate increase of up to 0.5%. People using an 80/10/10 are trying to avoid mortgage insurance on the first mortgage so they may still be saving money. A lot of people who want to refinance their first mortgage, and already have a second mortgage, are noticing significantly higher than those they read about. Many homeowners took out large second mortgages when their home values were at their peak. Now, they either have little to no equity in their property or they may even be upside down on their property (they owe more than the property is worth). If these borrower are able to refinance, their rates wills urely be higher that the best possible rates.
7) Wrong property type. If you own or are purchasing anything other than a single-family, detached residence your rates will be higher. Condos, townhomes and 2-4 unit buildings may have add-ons to the rates or points.
8) Refi versus purchase. Also, the best possible rates are usually for purchase transactions. If you are refinancing, or taking cash out on your refinance, you will see higher rates.
9) You aren’t going to live there. Last, the occupancy of the property will affect the interest rate. If the property is a second home or investment property your rates will be higher.
This list is by no means an all-inclusive list of the reasons you may not be able to get the rock-bottom, lowest-possible rates you’ve been reading about, but it gives you some ideas. Make sure you are working with a reputable, experienced lender who will give you knowledgeable and honest answers to the rates you are being quoted.
And you can always reach out to me at BarkerLoans@gmail.com or by calling 708.473.7688 to answer any questions you have or to help you with your financing needs. There’s never an obligation, and always free information!
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