September 30th, 2016 5:35 AM by Jackie A. Graves, President
Wondering why you didn’t receive the low mortgage rate you
saw advertised on TV? Well, there are a ton of reasons why the quote you
obtained was higher. Let’s explore a lot of them.
a biggie. Most lenders assume (for the sake of their super low advertised
rates) that you have stellar credit. So the fine print might say something
to the effect of “minimum 740 FICO score.” That means your interest rate will
be higher if you don’t have a score that high.
Fortunately, the fix is easy…work on your scores ahead of time
to ensure they’re where they should be and you won’t suffer. You could even get
a pricing break in the process if your scores are really good!
lenders also tend to advertise rates on the basis that you’ll occupy the
subject property. If it’s not going to be your primary residence, expect the
mortgage rate to be significantly higher. Put simply, second homes and
investment properties create more risk for lenders, and they must adjust rates
higher to account for that.
from a higher rate, you’ll also be more limited in terms of how much you can
borrow. Sadly, there’s not much of way around this if you’re an honest
of the property, you might be subject to a higher mortgage rate if it’s a condominium or townhouse. Again, these properties are
riskier to lend on for a variety of reasons, and as such, you will pay more in
You might be able to avoid the condo hit if you keep your
loan-to-value below a key threshold, such as 75%. Of course, not everyone has
that type of money lying around.
Also note that lenders often hit borrowers if the property is a
Another reason your mortgage rate may tick higher is if you lock
in said rate for a long period of time. Perhaps you like mortgage rates where
they are, but don’t plan to close for a couple months.
The benefit of that guaranteed low rate for a longer period may
cost you…and it could turn out that rates move lower over that time, not
higher. Of course, not everyone likes to take risks and you could still come
out ahead if they rise.
banks advertise conforming mortgage rates. These are good up to $417,000. If your loan amount is higher than
that, you could face a higher mortgage rate because your loan will be
considered either high balance or jumbo.
If you’re close to this limit, you might be advised to lower
your loan amount slightly to squeeze under the maximum and snag the
corresponding lower interest rate. Interestingly, some lenders that specialize
in jumbo loans may actually charge higher rates to those with smaller loan
Yes, it might sound crazy, but you can actually pay more for a
smaller loan amount too. I’m talking much smaller than the conforming loan
limit, say $150,000 or less. Or below $100,000. Of course, some lenders might
be happy to take such a loan without an adjustment whatsoever. So find the
right lender for your loan amount.
purchase and a rate and term refinance are generally treated the same when it
comes to mortgage rates, you’ll probably get stuck with a higher mortgage rate
if you need to cash out.
Lenders charge a premium when you need to extract equity from
the property, so expect a pricing hit for a cash out refinance. You can even
get hit if it’s a rate and term refi. Additionally, understand that your LTV
will likely be more limited when cashing out.
of LTV, the higher your LTV, the higher your mortgage rate, all else being
equal. Again, this has to do with risk, something all lenders are undoubtedly
While it’s great to have low-down payment options such as the
Home Possible Advantage that requires just 3% down, the mortgage rate will be
higher compared to a loan with 10% or 20% down. Again, if you’re close to a
certain threshold, you may want to do the math to see if bringing in more at
closing money makes sense.
Another way your mortgage rate may get driven higher is if the
property has multiple units. While you’re generally safe if it’s just two
units, a 3- or 4-unit property could cost you. Combine it with non-owner
occupied status and the interest rate can shoot much higher.
Not a fan of closing costs? Neither am I, but if you want a loan
with low or no out-of-pocket costs, expect a higher mortgage rate in exchange.
are more than happy to provide you with a lender credit. Just understand that
it is you that is paying for this credit, and the closing costs aren’t avoided,
they’re just paid for via a higher interest rate. Still, it’s possible to shop
around and find a low rate with a credit to boot.
it’s not super popular at the moment, a lot more lenders are offering an interest-only option again.
This makes the monthly payment lower, but in exchange for that benefit you
might pay a slightly higher interest rate.
Again, lenders assume you’ll make fully-amortized payments, so
anything else will likely come with a pricing hit.
Let’s say you have some difficulty qualifying for a mortgage. A
lender may hit you for the exception they have to make in order to get the loan
to fund. The same might be true if they have to do a manual underwrite (as
opposed to automated) to approve the thing.
The best thing you can do is get pre-approved well before loan
shopping to snuff out any red flags and address them before the underwriter
While it’s largely a thing of the past, there are stated income
products available today. And because they’re relatively rare, you can expect
the corresponding mortgage rate to be higher. How much higher depends on other
things such as credit score, LTV, and so on.
lenders will charge pricing adjustments for specific loan programs. There could
be a hit if it’s a USDA loan, or a hit at a certain LTV for an
adjustable-rate mortgage. Same goes for an FHA streamline or a VA IRRRL without an appraisal. Be sure to shop around
to avoid these hits as not everyone charges them.
You may also get hit if the lender allows a recent short sale or
foreclosure. In their eyes, you’re lucky to get financing, so expect a rate
adjustment for the convenience.
don’t want to pay mortgage insurance out-of-pocket, or at least not explicitly
so, you can opt for lender paid MI. However, just because the lender pays
it on your behalf doesn’t mean it’s free. Instead, it makes your mortgage rate
increase. So it’s still paid by you, just via the interest rate as opposed to
upfront or separate.
decide you want to forego an escrow account and
manage the payments of property taxes and homeowners insurance on your own,
your lender may charge you for the convenience.
folks get fired up at the notion of someone else holding onto their money, but
it might be cheaper to just let them handle those payments. Your better plan for the money might fall short of the
interest rate savings on the mortgage.
Back to that all important property tied to the mortgage. The
subject property aside, if you own a bunch of other homes you might actually
get hit with a pricing adjustment. Again, risk is the name of the game here,
and someone who owns a ton of mortgaged properties is seen as riskier than
most, even if they’re seasoned investors.
Even if your borrower profile is pristine and the property is as
vanilla as they come, you could still wind up with a higher mortgage rate
thanks to a state-based pricing adjustment. Yes, some lenders may hit you just
for living in a certain state, or for a certain combination like cash out in
Texas. If that’s the case, you may want to look at other lenders.
a lender will allow you to exceed certain debt-to-income ratio thresholds,
there may be a hit for it. It’s kind of ironic seeing that it could bump up
your interest rate (and DTI) in the process. This is something you can
hopefully avoid by keeping outstanding credit obligations to a minimum…in other
words, wait to swipe (or
dip) those credit cards until the transaction is done!
also get stung if you’ve got a second mortgage behind your first. Yes, this too
has to do with risk. The lender originating the first mortgage knows the
presence of a second
mortgage, even if extended from a different lender, can make it more
difficult to pay the bills each month. As such, the rate on the first might be
it’s like beating a dead horse, but it’s true. If you don’t shop around you
might wind up with a higher mortgage rate. Lenders (and brokers) can make
varying amounts on your loan. Some charge more, some charge less. You won’t know
that if you only speak to one lender.
Keep in mind that lenders may also charge higher rates for a
combination of high-risk factors, such as high LTV coupled with an ARM. So the
more stuff you’ve got going on, the higher the rate.
Conversely, if you present little risk to the bank you might
actually qualify for a pricing special that can lower your effective mortgage
At the end of the day, some of these pricing hits are avoidable
and some are not, depending on your situation. To ensure you land the best
rate, limit the hits by crafting your loan accordingly and shop around to find
a good match where your particular loan isn’t penalized.
Colin Robertson - To view the original article click here