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 I can’t answer in a 30-second conversation. I wish it were that easy.
After years of experience, now I don’t hesitate to answer – I respond with, “What rate do you want? “This tactic usually serves to disarm them a bit and allow me to detail 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 is different because of Loan-Level Pricing Adjustments. Loan-level Pricing Adjustments are not discretionary fees, nor are they a profit source for me or my bank. These are federally mandated fees per Fannie Mae and Freddie Mac 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. (Keep in 2nd lien position)
- Doing a “cash-out” refinance with less than 40% equity in your home.
- Having a credit score of 740 will save you almost a full percent in rate relative to a 640 score.
- Investment property can add up to a full percent or more compared to the 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 scenario at Fannie’s site.
Why Getting the Lowest Rate Might Be a Bad Idea!
I know it feels good to tell your friends that you have a lower rate than them, but you might just be spending more money over time to get that rate because you are paying points (aka extra fees to buy the rate down). And since many first-time homebuyers sell within 6 to 8 years, having that low rate was just for show. I know this might sound counterintuitive, but you may be paying more because of that lower rate.
The one constant in life is that life is continually changing. Folks can’t envision what will happen in years to come because life just happens, and maybe down the road, they need to a cash-out refinance to pay for required maintenance or repairs, or to help with their kids education, a wedding, or help with a new car, the list goes on and on.
The important thing is to work with a lender who will take a little bit of extra time to crunch some numbers and help you decide whether a buydown or lender credit is better for your long term and short term goals.