Why Isn’t My Rate As Low As The Average or Advertised Rate?
Interest rates have been incredibly low for a very long time and it will be interesting to look back five years from now and see if low rates are truly a “new normal” or just a recession era phase.
Even though rates are low we’d all like to get the “lowest” when we apply for a refinance or to buy a home. You might call a couple of different banks, credit unions, or your friendly neighborhood mortgage broker to get quotes. You get some great rates, choose someone to work with and make an application.
Then the Good Faith Estimate comes back and the rate is ¼% to ½% higher than the quote you got over the phone. What happened?
The easiest answer may just be that the market got worse during the week it took you to call all the lenders and then submit the loan application. Rates can and do move ¼% in just 1-2 days.
But what if the market hasn’t moved?
First, let’s deal with the rate box above this article that posts Freddie Mac’s “average” interest rate. You can read Freddie’s entire explanation of how they come up with this average at http://www.freddiemac.com/pmms/abtpmms.htm. The short version is that the number you see above was gathered by polling mortgage lenders across the country a full two weeks before you read this article in the Outpost.
The more complicated explanation is the fact that advertised and average rates are really only useful to indicate the market trend and not the rate any individual loan applicant is going to receive.
There are at least six different categories of rate “add ons” that may impact the rate you actually pay, and there is probably a couple I’m missing. But just the following can add anywhere from ¼% in cost (fees, not interest rate) to 4% or more in cost. On a $200,000 loan request that is anywhere from $500 to $8,000 added to the cost of your loan.
Loan Level Pricing Adjustments or “Risk Based Pricing” – applies to any fixed rate loan with more than a 15 year amortization. The pricing adjustment (fee) ranges from a credit of .25% to a cost of 5.5% of the loan amount. What determines the LLPA fee you pay? It’s based upon your credit score AND the appraised value of your home, neither of which lenders know at the time they give you a quote over the phone.
There are two other Credit or Loan to Value matrices that might apply as well. If you have a HELOC or home equity loan and/or if you are taking cash out of your home, you will pay anywhere from .25% to 4.25% in fees.
Then there are relatively small adjustments based upon your property type (condos, duplexes, triplexes, and fourplexes), and how long you want to lock the loan terms for (15, 30, 45, 60 days are common lock periods). These can add between a ½% credit to 1.75% in cost.
And these are all cumulative. Lenders must evaluate your credit report, property type, and your loan request before they can determine all the factors impacting the rate you will get. Someone with a good FICO score of 739 and borrowing up to 80% of their home’s value is going to have a minimum of ½% fee added to their cost. That same borrower with a 659 FICO will have at least 3.25% added.
Can you avoid these fees by going to a different lender? Not if your lender sells loans to Fannie Mae or Freddie Mac and right now it’s almost a certainty they do. Hopefully this helps explain why the rate you get might be different than the average or advertised rate. It’s virtually impossible your application is “average.”
Michael has 21 years’ experience in the lending industry. In that time he’s directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to MMullin@TheLoanConsultant.com.