Without fail, the number one question I get from first time callers looking to refinance or purchase a new home is “what’s your rate?” I used to stumble a bit when asked this question because there is so much involved in getting an accurate interest rate and one that can’t be solved in a 30 second conversation. I wish it were that easy people.
After years of experience, now I don’t even hesitate with my answer – I now respond with “What rate do you want?“ This tactic usually serves to disarm them a bit and allow me to go into more detail regarding the components that go into an interest rate.
If you are not getting the rate you heard on the radio, or the interest rate you read in the Real Estate Section of the newspaper, it’s typically not because of some elaborate bait-and-switch scheme. In all probability, your rate has been altered by Loan-Level Pricing Adjustments. Loan-level Pricing Adjustments are not discretionary fees, nor are they a source of profit for me or my bank. These are federally mandated fees per Fannie Mae and Freddie Mac designed to compensate for loans with greater risk.
They work just like auto insurance. With greater risk, come higher premiums. It’s an add-on to the base rates set by Wall Street. Here are just a few triggers that will increase your rate or fees:
- Having a second mortgage or line of credit that you would like to subordinate
- Doing a “cash out” refinance with less than 40% equity in the your home
- Having a credit score of 740 will save you 1 to 1.5% relative to a 680 score
- Investment property can add up to 1.75 to 3% compared to primary residence
- If you like Macaroni and Cheese it will cost you. Not really, just making sure you are paying attention
You can research your personal scenario at Fannie’s site.
How can I avoid these higher fees and rates?
Depending upon your loan characteristics, there may be a non-Fannie/Freddie alternative that can give you a better rate without the high-risk fees. But guess what? They are going up! Starting April 1st, 2011 most conforming loans will find higher loan costs or higher rates. And to make matters worse, they will be incorporating some across the board fees regardless of your good credit scores.
Now you are armed with the information needed to ask more than just, “what’s your rate?”