Mortgage Interest Rates and How They Are Calculated
Before you call and ask for a rate quote on your next mortgage loan – please consider all of the qualifying factors. Not all interest rates are created equal. There are MANY factors that go into an interest rate calculation and can be very confusing for most people. Loan originators can no longer barter with their commissions to get you a better rate or to pay some of your closing costs,
thanks to a new rule imposed in April of 2011.
Therefore, the interest rate you get is dependent on all of the following:
1. Day of the lock
Interest rates change on a daily basis and often multiple times in a single day.
Knowing the best day to lock in a rate is the job of the mortgage professional.
2. Length of the lock period
Interest rates can be locked for time periods of 15 to 60 days (and sometimes even longer). The longer the guarantee period – the higher the interest rate price. Most lenders will not allow a short 15 day lock unless a loan has completed the underwriting
phase and is ready to close. The shorter lock term is typically what the media quotes and is unavailable if you are just
starting a transaction.
3. Type of Loan
Interest rates are different for FHA, VA and Conventional Loans. They differ between fixed and adjustable
loans. They differ between all of the various loan programs.
4. Term of the Loan
The longer the term of the loan – the higher the price. A 15 year loan is lower in rate than a 30 year loan.
5. Size of the Loan Amount
Loans over $417,000 are subject to higher rates, however, loans under $100,000 can be priced higher also.
6. Type of Property
Rates are higher for a condo than for a single family home. The type of property and land use are factors in loan pricing.
7. Credit Scores
There are additions to pricing for various credit score variations.
8. Use of Loan Proceeds
Rates are generally better for a purchase loan than for a refinance. There is a usually a penalty to pricing if
you elect to take cash back from a refinance as opposed to just refinancing the balance.
9. Where the property is located
Highest eligible loan amounts for particular programs are determined by counties.
You can borrow more in LA and Orange Counties on a conforming basis than
you can in San Diego County. Riverside is impacted even more. Therefore you
will pay more for a $600,000 loan in San Diego than you would in Los Angeles.
10. Value of your property compared to your
loan amount (LTV – Loan to Value)
This is perhaps the most significant pricing factor for interest rate calculation and cannot be determined until
after an appraisal has been completed. The less equity you have can add up fast in your interest rate
determination. Diminishing equity has been a real problem in recent years.
11. Use of the Property
Whether you occupy the property as a primary residence, secondary home or purchasing for investment affects the
interest rate.
12. Closings costs paid in cash, financed or
paid by the lender
Sometimes it is advisable to refinance a loan with no closing costs (a free loan) but be aware – the interest rate will
be higher. A matrix of pricing options is available depending on how much cost you are willing to pay (or not pay).
13. Paying Points
Interest rates can be bought down by paying points.
14. Impounds or no impounds
Usually the pricing of a loan is a smidge lower if you allow the lender to impound for taxes and insurance.
15. Fannie and Freddie Loan Level Pricing Adjustments (LLPA)
Ever since the two Government Sponsored Enterprises (GSE’s) went into conservatorship of the US government there has
been significant pricing adjustments based on a matrix. These additions to pricing must be calculated to see what your final interest rate will be. One example of these pricing adjustments affects everyone in California and is called Adverse Delivery Charge and is imposed on all loans because of declining property values. If you want to see for yourself how your loan will be impacted then you can follow this link:
https://www.efanniemae.com/sf/refmaterials/llpa/pdf/llpamatrix.pdf
With all of these things influencing an interest rate, is it
any wonder that we can’t pull a rate off the tops of our heads anymore. Next time you think you got a better quote
from one lender compared to another, make sure that all of the pricing factors
have been disclosed.
I take pricing of loans very seriously – you should too.
I thank you for trusting me with your home financing and I’m
always available to take your calls, answer your questions – and yes – quote
you a rate that you can bank on.
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