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Best Purchase and Refinance Mortgage Rates

Some people are offered mortgages with rates as low as the advertised rates they see; others do not, instead they are offered higher rates.  This article will show you how lenders determine your rate and what you need to do to get the best rate you can get.

Why Some People Can’t Ever Get the Best Mortgage Rates

Lenders advertise their lowest interest rates, the rates they’re willing to give to the best borrowers who are buying detached single family houses using large down payments.  Everybody else gets the best interest rates after price adjustments are applied.

Mortgage Rates and Price Adjustments

Each lender determines its rates based on a combination of two factors: a0 how much money costs the lender (what the Fed charges) on a given day and b) greed (how much the lender wants to make).  Some lenders will speak of greed in terms of risk.  It’s their perception of risk, based on their greed, if you ask me.  Or else, all lenders will have the same rates and price adjustments if you checked a the same time.

Example of Conventional Products and Pricing

The list below shows what rates for conforming conventional loans might have looked like for 2 lenders on a day in April 2018.

On the left, you have the rate for lender A; the next two rows reflect how much Lender A wants a loan at a particular rate, specifically, it shows the amount of money, expressed as a percentage of the loan amount, it is willing to pay to get a loan.

Lender A Lender B
Rate 15 Day 30 Day Rate  15 Day  30 Day
 5.125  -4.255  -4.310 5.125 -4.230 -4.435
 5.000  -3.968  -3.875 5.000 -3.692 -3.597
 4.990  -3.920  -3.825 4.990 -3.644 -3.549
 4.875  -3.759  -3.664 4.875 -3.494 -3.399
 4.750  -3.290  -2.987 4.750 -3.125 -3.013
 4.625  -2.758  -2.663 4.625 -2.492 2.397
 4.500  -2.121  –2.026 4.500 -1.885 -1.760
 4.375  -1.555  -1.500 4.375 -1.328 -1.233
 4.250 -0.955  -0.900 4.250 -0.729 -0.634
4.125  -0.284  -0.189 4.125 -0.004 0.091
4.000  0.308  0.403 4.000 0.587 0.682
3.875 1.033 1.128 3.875 1.314 1.409

 

As you can see above, Lender B’s pricing is a bit higher.  And the above is not all that’s happening.  Lenders / brokers / loan officers, they all want to make money with every loan.  Usually, borrowers are charged between 1% and 2.75% on conventional conforming loans and on government loans.

Let’s assume that both Lender A and Lender B want to make 2% on a loan.  Lender A would give you a rate of 4.500% (the closest to (yet above) 2% credit) while Lender B would give you a rate of 4.625%.  Yes, the credit is a bit higher, so you’d get a bit more money to apply towards your closing costs, but still a higher rate.

Mortgage Rate Adjustments

But things are not that simple.  The price is not all that matters.  Here’s how adjustments work:

All lenders have adjustments for FICO’s and down payments and for cash-out refinances and condos; some have adjustments for loan amounts under $150,000 while others do not; some have adjustments for the subject property being a 3-unit or a 4-unit building or not.

The adjustments are in relation to credit scores.  The first one you’d see would be for LTV (loan-to-value ratios); the higher the LTV (i.e., the more you borrow), the higher a risk you are, the higher the adjustments (except when the LTV is in the 75-79.99%, then the adjustments are higher than if the LTV is in the 80-84.99%: LTV’s of 80% and higher require mortgage insurance.

Then you have adjustments for cash-out refinance, for property type, for many other things.

To illustrate how it works, lets assume 3 borrowers apply for a mortgage.

Tom’s middle FICO score is 627;  Dick’s middle score is 685; Harry’s middle score is 725.

Below are some of the adjustments for 2 lenders.

Credit Score / LTV adjustments

Lender A LTV 70.01-75 80.01-85 90.01-95
620-639 -1.750 -2.000 -2.000
680-699 -1.250 -1.250 -1.500
720+ +0.250 0.000 -0.500
Lender B
LTV 70.01-75 80.01-85 90.01-95
620-639 -2.000 -1.750 -1.750
680-699 -1.250 -1.000 -1.000
729-740 -0.500 -0.500 -0.500

 

Cash-Out Refinance Adjustments:

Lender A LTV 70.01-75 80.01-85 90.01-95
620-639 -1.500 n/a n/a
680-699 -1.125 -1.500 n/a
720+ -1.000 -1.000 n/a
Lender B
LTV 70.01-75 80.01-85 90.01-95
620-639 -1.625 n/a n/a
680-699 -1.250 n/a n/a
720-739 -1.125 -1.500 n/a

 

Loan Amount Adjustments:

Lender A LTV 70.01-75 80.01-85 90.01-95
<$60,000 -2.000 -2.000 -2.000
$60,000-$74,999 -1.250 -1.250 -1.250
$75,000-$99,999 -1.000 -1.000 -1.000
Lender B
LTV 70.01-75 80.01-85 90.01-95
$50,000-$75,000 -1.000 -1.000 -1.000
$75.001-$100,000 -0.500 -0.500 -0.500

 

Property Type  Adjustments:

Lender A LTV 70.01-75 80.01-85 90.01-95
Condo -0.750 -0.750 -0.750
2-unit -1.000 -1.000 n/a
3-4 unit -1.000 -1.000 n/a
Lender B
LTV 70.01-75 80.01-85 85.01-90
Condo -0.500 -0.500 -0.500
2-unit -1.000 -1.000 n/a
3-4 unit -1.750 -1.750 n/a

 

Example 1: Interest rate with no price adjustments

If Harry with his middle FICO score of 725 uses a broker that wants to earn 2% on each loan they make applied for a mortgage to purchase a single family house with a loan amount of $145,000  and a down payment of 12%, there would be no adjustments.

Using the first table, we would have to find each lender’s interest rate that has a credit of at least 2%, as we have done above and we’d get this:

Lender A Lender B
-2.000 broker fee -2.000 broker fee
4.500% interest rate 4.625% interest rate

 

So, Lender B rate is higher.

Example 2: Interest rate with 1 price adjustment

Dick with his middle FICO score of 685 bought the same  $145,000 house for the same price and putting down the same 12% would have 1 adjustment (for score).

Lender A Lender B
-2.000 broker fee +
-1.250 credit score adjustment
-2.000 broker fee +
-1.000 credit score adjustment
That adds up to -3.250 That adds up to -3.000
Lender A’s 4.875% interest rate has a price of -3.664 for a 30-day lock, so the broker would give Harry a rate of 4.875%. Lender B’s 4.750% interest rate has a price of -3.013 for a 30-day lock.

 

In this case, Lender B has the lower rate.

Example 3: Best interest rate with 2 price adjustments

Let’s say Dick, with his 685 credit score, wants to buy a single family house for $110,000 with 15% down (loan amount of  $93,500).

Lender A Lender B
-2.000 broker fee +
-1.250 credit score adjustment
-1.000 loan amount adjustment
-2.000 broker fee +
-1.000 credit score adjustment
-0.500 loan amount adjustment
That adds up to -4.250 That adds up to -3.500
Lender A’s 5.125% interest rate has a price of -4.310  for a 30-day lock. Lender B’s 4.990% interest rate has a price of -3.549 for a 30-day lock.

 

Lender B has, again, the lower rate.

Example #4: Best Interest Rate With Low Credit Score

If Tom, credit score of 627, wants to buy a single family house with 5% down and a loan amount over $100,000?

He’d have only one adjustment, for score/LTV.

Lender A Lender B
-2.000 broker fee +
-2.000 credit/LTV price price adjustment
-2.000 broker fee +
-1.750 credit/LTV price price adjustment
That adds up to -4.000 That adds up to -3.750
Lender A’s 5.250% interest rate has a price of -4.310 for a 30-day lock. Lender B’s 5.125% has a price of -4.435 for a 30-day lock.

 

In this case, both lenders offer the same rate, with Lender B offering a slightly better credit (which could be applied towards closing costs) 0.125 or $125 for every $100,000 borrowed.  So, if Lender B’s closing costs were the same or lower than Lender A’s, Lender B would be the better option.

However, if Lender B’s closing costs were just a bit higher than Lender A’s, Lender A would be the better option.

Example 5: Best Interest Rate for a Cash-Out Refinance

Note that Lender B dislikes refinances.  They will not refinance any property at 80-85% if credit scores are 699 or lower, they would not do it for either Tom (627) or Dick (687).

This is a 3-part example.  We will have Tom, Dick and Harry borrow $180,00, cash-out refinance, against a single family house worth $250,000.  So, there will be 2 adjustments: 1 for credit/LTV and one for cashing out.

Part 1: Tom

Lender A Lender B
-2.000 broker fee +
-1.750 LTV/ credit price adjustment
-1.500 cash-out price adjustment
-2.000 broker fee +
-1.625 LTV/ credit price price adjustment
-2.000 cash-out price adjustment
That adds up to a -.5250 price. That adds up to a -5.625 price.
The rate for that price is 5.125% for a 30-day lock., with a credit of -4.310 or .94 less than the adjusted price.  That means that Tom has to bring 0.94% of the loan amount to the closing.  In dollars that is $1,692 (180,000x.94/100=$1,692). The rate for that price is 5.125% for a 30-day lock, with a credit of -4.435 or 1.19 less than the adjusted price.  That means that Tom has to bring 1.19% of the loan amount to the closing.  In dollars that is $2,142 (180,000×1.19/100=2,142).

 

The interest rate is the same. Lender B’s rate is $450 more expensive than Lender A’s rate.  The difference can be increased (or diminished) when the lenders’ underwriting fees are taken into account.  But not by much.

(Note that when getting quotes from different lenders directly or from different mortgage brokers, closing costs can vary a lot.  And you can end up with situations like this one:

Lender 1 has a rate of 5.125% that requires you to bring $1,692 for the rate to the closing and closing costs of $4,300.  So $5,992 closing costs.

Lender 2 has a rate of 5.125% that requires you to bring $2,142 for the rate to the closing and closing costs of $3,500.  So $5,642, so overall less expensive than the first one.

In my examples, the differences are not that big.  If you shop around, you’ll find the same happens often.  You’ll also differences that are much larger.

Part 2: Dick

Lender A Lender B
-2.000 broker fee +
-1.250 LTV / credit price adjustment
-1.125 cash-out price adjustment
-2.000 broker fee +
-1.250 LTV / credit price adjustment
-1.250 cash-out price adjustment
That adds up to a -4.375 price. That adds up to a -4.500 price
The rate for that price is 5.125% for a 30-day lock., with a credit of -4.310 or 0.065% less than the adjusted price.  That means that Tom has to bring 0.065% of the loan amount to the closing.  In dollars that is $117 (180,000x.0.065/100=$117). The rate for that price is 5.125% for a 30-day lock, with a credit of -4.435 or 0.065% less than the adjusted price.  That means that Tom has to bring 0.065% of the loan amount to the closing.  In dollars that is $117 (180,000x.0.065/100=$117).

 

Here, they are even. The broker will go with the lender that is easier to work with.  The lenders’s underwriting fees may make a bit of a difference, one being higher.  But easy to work with would trump that for most, maybe all, brokers.

If these rates were obtained directly from 2 different lenders or from different brokers, you’d have to take into account their closing costs to determine which one is the one to go with.

(Closing costs are the same if you have one broker; only the underwriting fees would be different. Usually they are rolled into the rate: the dollar represented as a percentage of the loan amount is added to the naked credit.

Part 3: Harry

Lender A Lender B
-2.000 broker fee +
+.250 LTV/ credit price adjustment
-1.000 cash-out price adjustment
-2.000 broker fee +
-0.500 LTV/ credit price price adjustment
-1.125 cash-out price adjustment
That adds up to a price of -2.750 That adds up to -3.625
The rate for that price is 4.750% for a 30-day lock., with a credit of -2.987, or 0.237 more than needed.  That means that, at closing, Harry will get 0.237% credit that he can apply towards his closing costs. In dollars that is $426.60 (180,000×0.237/100=426.60) The rate for that price is 5.000% for a 30-day lock, with a credit of -3.597%.  That is 0.028% less than needed.  Harry would have to bring the difference to the closing.  In dollars, he’d have to bring $50.40 (180,000x.028/100=50.40)

 Getting the Best Mortgage Rate

The above lenders are pretty close.  In real life, some lenders are greedier or more risk-adverse than others, so you can get a mortgage loan offer with interest rates that are quite far apart.

To make sure you get the best rate, you shop around, then apply and get a pre-approval from several direct lenders or brokers at the same time (or really close together).

Lenders change their pricing often, sometimes more than once a day.  If you get a pre-approval from one on Tuesday morning and from another one the following Thursday, you cannot possibly compare the rates.

So, make sure you choose your top 3  or 4 loan sources, give them all the paperwork they require, ask for a pre-approval on the same day, preferably at the same time.  But at least the same day.

(My example uses mortgage brokers.  Your bank will not get better rates necessarily: they adjust for risk too.)

Advertised Mortgage Interest Rates

In our example, both lenders offers an interest rate of 3.750%.  None of our mortgage seekers qualified for that rate.  My table did not include down payments over 40%, but people with such down payments and scores over 720 could get such a rate if they had no employment issues, no recent credit history issues and if they purchased a detached, single family house as a primary residence.

Conclusion

If you’ve paid close attention, you’ve noticed that low credit is expensive.  And that it pays to shop around.  Even differences of 0.125% can add up to real money real fast.