Why Mortgage Rates Are Not All Created Equal

by 05 Jan 2013

Purchasing a home or refinancing a mortgage? Now is a fantastic time to consider applying for a home loan. Mortgage rates are at market lows and affordability has never been more opportunistic. The question everybody asks when getting a mortgage is "what is your rate?"

While the mortgage interest rate is certainly important, a better question to ask would be "what mortgage loan program makes the most sense for me?

Here's why....

Mortgage Rates vary across the board, there is no one-size-fits-all interest rate on a per loan program basis

Buying a home, refinancing home, doing a remodel, whatever your motivations for a loan, the best question to ask your mortgage company is "what mortgage loan program is the most suitable for me?"

Asking this question upfront allows the mortgage lender to actually give you the mortgage rate:

1. Lets the lender know upfront that you want at least a few choices on loan programs which consistent your financial goals

2. Let's the lender qualify you for more than one program, giving you the full picture, so you can choose the program and rate that best suits you

3. Let's the lender quote you in interest rate that's attainable based upon your qualifying ability

4. Give the lender your full financial picture, so they can give you an accurate cost estimate

*Remember until the loan actually closes, everything is an estimate. The question becomes how close to the estimate of the numbers end up being?

The most important financial aspect is suitability. For example if you are trying to refinance your home and have equity, and you're looking for a payment reduction only, a loan containing mortgage insurance might not be the best possible loan program and a more standard conventional loan might be best suitable, as in most cases conventional loans represent the lowest possible monthly payment.

*Mortgage Tip: besides the fact that interest rates change on different loan programs there is another underlining component to all of this, Fannie Mae and Freddie Mac "conventional loans" are always going to be priced differently than government loans, and unique programs such as the HARP 2 are also priced much differently than interest rates you'll see on the Internet, on TV and in the news.

Here is a typical scenario we deal with on a daily basis:

Homeowner A is looking to refinance his mortgage, he has a loan amount of $300,000 left on his his current loan, has a debt to income ratio of 36%, his mid credit score is 740 and home value is $600,000 giving him a nice loan to value a 50%. He calls a local mortgage lender and they offer him 3.875% with no points on a 30 year fixed-rate mortgage.

Homeowner B is also looking to refinance his mortgage and his loan amount is $250,000, his debt to income ratio is 45%, and his middle credit score is 720. Unfortunately, he is over 100% financed on his home and while he qualifies to refinance on the HARP 2 Refi Program, his loan to value is 150%. After speaking with a local mortgage lender, he is quoted 4.25% on a 30 year fixed with no points.

So why the disparity in the rates quoted?

Taking a closer look...

  • Change in credit score-740 vs. 720-mortgage lender prices these loans differently based on the higher credit score
  • Change in loan to value-50% equity vs. being underwater by 150%-mortgage lender prices interest rate based on risk characteristics the secondary market has an appetite for
  • Change in debt to income ratio- Homeowner B has a higher credit risk file based on credit score, loan to value and his monthly debt load is significant.

Other changes that commonly affect interest rate when comparing mortgage loans:

  • Occupancy
  • PMI-Mortgage Insurance
  • Loan program
  • Loan purpose
  • Property Type
  • Lock Term
  • Loan Term
  • Amount of financed properties
  • Credit challenge
  • Monthly Escrows

You will see a change in mortgage rates depending on the loan program most suitable for your situation.

The single biggest variance in mortgage rates is the loan program.

Here's why...

Government loans including FHA loans and USDA loans are usually priced more aggressively and competitively than standard conventional 30 year fixed rate mortgages. Simply out, these loan programs are more attractive to investors in the secondary market and they were reward consumers with lower mortgage rates on these home loan types.

If you're thinking about purchasing or refinancing a property in Sonoma County, a primary residences, second home or investment property, and you would like a free mortgage rate quote, . You see Why Mortgage Rates Are Not All The Same.

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