Mortgage Updates

What happened to the days when a rate quote was easy and straight forward?  Do you as the customer feel frustrated by getting so many variances?  Let's talk for a minute about the variables that affect the pricing and yes, the rate for your loan.  Think of Rate and Price like salt & pepper, they go together.

The interest rate is the return on investment that the investor seeks and is largely dependent on what other rates of return are available and how "safe" an investor wants to be.  Investors choose their rates of return from investing in stocks, bonds, mutual funds, gold, etc.  The available rates of return are linked with "risk" and how investors see the risk at any given moment in time.  The last two years risk ebbs and flows on an hourly basis. 

Mortgage backed securities, are still seen as a relatively "safe" investment.  Only Treasury Bills (T-Bills) are  seen as "safer".  As investors move in and out of the markets, rates rise if stocks rally and fall if the stock market "appears" to risky. (This is the simplified version, for our purposes.) So that would be how the current rate comes to be.

The price of the rate takes some different avenues and is also associated with risk.  This is where in the last 2 years things have gotten really difficult.  Investors now price for risk in several levels.  Most investors are pretty consistent following the auspices of Fannie Mae and Freddie Mac.  The layering of risk also impacts your potential rate. 

Some of the factors to be considered; credit scores, loan-to-value; adverse markets/declining markets; refinancing, refi with cash out, combined loan to values, escrow waiver.  Within these groups are sub groups. 

Example: Credit scores with loan to value combinations, such as: Loan to value over 75% and less than 80% and lower mid credit score of all borrowers is 641-680.  That adds a cost for the rate.  That cost could be .50 - 1.00 point.  Loan size also matters.  If the loan is "small", under $50,000 there is a .75 point cost from the investor.  Small loans cost just as much in servicing, but the return is smaller... therefore the additional cost.

So, you see it isn't easy to give you, the customer a really good rate quote until I know all the facts. Credit scores, declining market area or adverse market area (?) loan to value... ah that means we need the appraisal, because until we have a solid value - we still have an unknown.  So best case an early rate quote will only give you a general feel for current rate and not necessarily reflect what your rate will be.

Another factor in the "price" of your interest rate is the length of the rate lock. If you ask the investor to Guarantee your rate for your closing in 60 days, there is a charge.  Investors say, "OK.  We will take this bundle of $$ off the shelf and set it aside for you Mr. Jones.  We will hold it for you and not loan it out to another customer.  Of course, we have to factor in the holding time 'cost', because our money cannot just sit on the shelf and earn nothing."

So to lock your rate for 60 days might cost you .50 in points and that would be the rate/point quote I would give to you IF I knew that you wanted to be sure that your interest rate did not increase during the escrow period of your loan transaction.  Let's look at how points break down: 

• 1 point would typically go toward the lender's Origination Fee.  (This is what pays the office bills, keeps the lights on and a part will go to me- your loan officer!) 
• Then you have points (or parts of points) that off set what the investor sees as risk.
• Points priced in for your rate lock time. (Money on the shelf.)
• Points to Buy your Interest Rate Down.

We haven't talked about points to buy the rate down yet.  This is where you make the decision that you would like to pay an extra .25 in points to reduce the life time note rate by .125.  It's always important to look at how long it will take you to "recapture" this cost.  But, if you plan on living in your home for five or more years a small rate buy down often makes sense.

So remember, most lenders will be diligent in quoting you the best possible rate available at the time. - Also, remember there will be lots of factors that could result in changes, even without the constant market fluctuations.