Question of the week: What determines my interest rate?
Answer: On my website I list twenty-four factors that impact the interest rate and cost of your mortgage. Many of these factors impact your rate by determining which mortgage program you will need to use to purchase your new home or refinance your existing mortgage.
Each lender has a matrix for mortgage rates and costs that is used to determine price adjustments for a particular mortgage situation. The most important factors that will impact your mortgage are the length of time needed to lock the mortgage, the loan to value, credit score and property type.
Lock period The longer the period for which your rate lock is held the higher the cost of the mortgage in fee. Most lenders offer lock periods of 15, 30, 45, 60 and 90 days. Generally the 15 day locks are reserved for loans that are ready to go to loan documents and closing. As a rule of thumb every fifteen day period is an additional cost of 0.125 to 0.25 points depending on the lender and loan program. When I advise to “lock through your escrow period” I am advising you to lock on a 30, 45 or 60 day lock depending on how long until you are scheduled to close. Most generic mortgage rate quotes are for 30 days. When getting a quote inquire as to what the lock period is that is being quoted; being quoted a 15 day lock for a mortgage to purchase a home that will not close escrow in 45 days is not sensible.
Loan to value Conventional mortgages have tiered pricing, particularly high-balance mortgages over $417,000, for different loan to values. (Loan to value is calculated by dividing your mortgage amount by the property value. A $360,000 on a $400,000 home has an LTV of 90%) Price adjustments occur starting for mortgages greater than 60% loan to value, the typical adjustments values above occur at 5% intervals to 95%. The price adjustments are not symmetrical from loan to value to loan to value, also factoring in to these price points are your credit score.
Property type If the property is not a single family residence (SFR), not necessarily a detached home as attached homes sometimes known as PUDs (Planned Urban Developments) are also considered SFRs. Technically a condominium unit is a single family residence, however it is priced higher than a SFR because of the deed of ownership. For mortgage purposes a single family residence is a property where the land on which the unit sits is part of the deed and owned solely along with the structure. Condominiums have shared ownership of the land between all unit owners. So unless you are buying, or own, a property in which you own the land and the structure you can expect a price adjustment for your mortgage.
Credit score Gone are the days of everyone with a FICO score over 680 having the same price for their mortgages. Once above the minimum threshold of the lender is met, anywhere from 640 to 680 depending on the lender, pricing adjustments come in for credit score ranges. The higher your score the lower the price added to the base rate. Most mortgages have the “base” price, or zero add-on or reduction, for scores at or above 740. Some lenders will lower the price if your credit score exceeds 780, depending on your loan to value and some other factors.
Not mentioned are loan amount, occupancy and if a refinance if you are doing a rate and term or cash-out refinance. These are some additional factors that commonly impact price adjustments for mortgage applications.
Rather than adjusting the interest rate for each factor the price (points) is adjusted for each factor. The different price adjustments for each of the many factors are aggregated to a final price adjustment and then calculated to determine the interest rate and price. If your mortgage application has enough adjustments your rate could be one-eighth, one-quarter, one-half percent or more higher in interest rate. That is why when someone calls and says, “what is your mortgage rate?” the only is answer I can give is, “let’s talk about your specific situation….”
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This week’s blog postings:
U.S. Debt Downgrade Good News for Mortgage Rates On Monday the investment markets woke up to a major credit rating company putting out a negative rating on U.S. Treasury debt, debt you and I pay for.
Home Sales Up, Prices Down In March A look at housing data for March and some opinion on what the future may hold for housing markets.
U.S. taxpayers pay negative interest on debt, or do they? Investors purchased bonds that had negative interest at time of sale, but possibly not so negative when sold. Impact on taxpayers and mortgage rates discussed in this post.
Feedback is always welcome! Please let me know if what you think of a bit more information through the week on specific economic events and issues relating to the mortgage and housing markets versus more detail on the Friday update. Instant feedback click here
A lot of focus on bonds and debt this week. Mortgage Backed Securities have risen to recent highs and are hold rates from last week’s drop. There could be a move for still lower rates, however we are still in a volatile market and floating your rate into your escrow period is a risky proposition.
Rates for Friday April 22, 2011:
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*
30 year conforming 4.75% Flat
30 year high-balance conforming 4.875% Flat
30 year FHA 4.375% Flat
30 year FHA jumbo 4.625% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.
*With new Fed regulations in place cost increase has been added to weekly rate quote. Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
Keep in mind the Open House page on my website where agents who are holding weekend open houses can show the affordability of their listings. If you, or someone you know, is in the market for a new home call me for mortgage qualifying and check out the open house page for your potential new home. Weekend Open Houses
A very late Easter this year, the latest it has been since 1943 when it was April 25th, the latest Easter can be celebrated. The next time Easter will be this late will be in 2038. Don’t forget to count all your eggs before you hide them, one year my Mom forgot to do that and a couple sat out in the hot Oklahoma sun until sometime in the summer when the smell led us to them! Yuck!
Happy Easter and have a great week,
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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