Everything You Need to Know About Rate Shopping
Now that you are in the market for a mortgage, every so-called financial expert will tell you that you should shop around to get the best rate and save the most money. While I agree you should want the best deal possible, you also need to understand that you aren’t shopping for a set of tires.
There are so many determining factors when it comes to the interest rate you qualify for as well as the amount of closing costs you will pay. For the purpose of this post we will discuss the main factors of shopping interest rate and shopping mortgage costs.
The first thing you need to understand when shopping for the best rate is that advertising is designed to get you to call whomever is advertising. For this reason, a lot of advertisers display super low interest rates to get you to call.
These super low rates are only offered to borrowers that meet a very specific criteria and this criteria is usually in very small print and labeled “Assumptions”. Below you will find the “Assumptions” that are typically listed with these incredibly low rates. This one is for a rate of 3.625% on a $200,000 loan amount.
“30-Year Fixed-Rate Mortgage: The payment on a $200,000 30-year Fixed-Rate Loan at 3.625% and 70% loan-to-value (LTV) is $912.11 with 1.875 points due at closing. The Annual Percentage Rate (APR) is 3.85%. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply.”
What these assumptions mean is that in order to get that 3.625% rate, the borrower would need a 30% down payment, or 30% equity in the home, as well as pay 1.875% of the loan amount. This would cost the borrower $3,750 in points to get that rate.
Not many borrowers can meet the criteria of the “Assumptions” on these low advertised rates but most consumers don’t read the “Assumptions” and expect to get that rate because it is advertised. The sad part is that these “Assumptions” are still vague and don’t account for other important factors that affect both rate and mortgage costs.
If you’ve been through this guide than you know that each mortgage program has different requirements to qualify which include credit score, loan to value, and debt ratio. The rate at which you qualify for has different requirements as well and we’ll discuss those now.
Interest Rate Adjustments
The interest rate you qualify for is based off of the following factors;
- Credit Score
- Loan to Value
- Loan Amount
- Property Type
- Term of Loan
- Type of Rate
Each of these factors have incremental adjustments based off of where each individual borrower falls within each category. Some factors are linked together like Credit Score and Loan to Value. Below you will find a brief explanation of each.
When it comes to credit score, if you have a 740 score, you get the best rate possible for your specific scenario. That doesn’t mean you get the advertised rate because there are still other rate adjustments to consider.
For example, assuming everything else is identical, the difference in interest rate from a borrower with a 640 and a borrower with a 740 can be over 0.5%. Let’s say that the 740 score qualified for a 3.25% rate and the 640 qualified for 3.75%.
On a $200,000 loan, that’s $56 more per month for the 640 score. That means the 640 score has to pay over $20,000 more over the 30 year mortgage.
Loan to Value
Loan to Value means what percentage of your homes value will be used for the new mortgage. if the home is worth $200,000 and your loan is for $180,000, you would be at 90% loan to value. The lower your loan to value the better your interest rate will be.
Credit Score and Loan to Value adjustments are complementary. This means that the adjustment to your interest rate is determined by the combination of your credit score and the Loan to value of your particular transaction.
The Loan Amount is obviously the amount that the borrower is approved to borrow. In Michigan, there are typically rate adjustments on any loan under $150,000. The rate goes up when the loan amount goes down.
The Property Type relates to whether the home is a single family residence, a condo, a manufactured home, or a multi-unit home. Lenders treat each property type differently and most won’t even lend on a manufactured home. These adjustments can affect the rate by as much as a 0.25% or more.
Term of Loan
The Term of Loan refers to length of time needed to repay the loan. This can range from 10 to 30 years for mortgages and the shorter the term the better the rate.
Type of Rate
The Type of Rate refers to whether the rate is fixed or adjustable. A fixed rate will stay the same for the full term of the loan and an adjustable will begin adjusting after a period of time has passed. Adjustable rate mortgages are offered in 5-Year, 7-Year, and 10-Year terms and offer a lower rate than fixed rate mortgages.
When it comes to occupancy, there are rate adjustments for anything that is not owner occupied. This means that if you are buying a rental property or a second home, your interest rate may be slightly higher depending on the other adjustments for your situation.
There are also rate adjustments for the purpose of your mortgage loan. These include renovation financing as well as refinancing a loan to get cash out.
It’s hard to find two borrowers with identical circumstances and that is why rate shopping for a mortgage is very different than shopping for a set of tires.
Getting a Quote on Closing Costs
When it comes to the costs associated with a mortgage, most of them will be similar from broker to broker. This is because most of the costs are third party charges are beyond the control of the mortgage lender.
These costs include the establishment of your escrow account, title insurance, tax pro-rations, the appraisal, and recording fees. If one mortgage broker gives you a vastly different quote than another on these fees, one of them did the math wrong.
However, there are other closing costs that can vary from lender to lender. Most lenders charge an underwriting fee but some lenders also charge an application fee as well as a processing fee.
Also, depending on what Title Company is used, there will be a closing fee between $150 and $500. The lender does not choose the Title Company unless it is a refinance transaction. Therefore, any mortgage quote regarding the closing fee will be an estimate until the Title Company is known.
This makes it really hard to get an accurate rate quote if you don’t have all of the transaction information available. So keep that in mind when shopping for the best deal.
Things You Need to Know Prior to Shopping For a Mortgage
If you are going to shop around for interest rates you will need to know the following information;
- Your Mortgage Credit Score
- The Loan Amount
- Approximate Value
- Type of Property
- Purpose of Transaction
If you have this data you should be able to get an accurate quote for rate and fees. It’s important to keep in mind that the rate quote is not a commitment to lend at that rate. As a lender, we will want to verify the information you’ve provided prior to putting together the mortgage application and locking your interest rate.
Since interest rates can change on a daily basis, the rate you were quoted could change by the time you provide the documentation to complete the mortgage application. Personally, I think getting pre-approved by a lender should be the first step prior to shopping for an interest rate.
I also believe that if you know like and trust the lender that originally pre-approves you, you should do business with them unless something seems out of place. The reason I say this is that most mortgage professionals are sales people and they will play off your emotional triggers of wanting to get the best deal possible.
Let’s say you are pre-approved with one lender and they provide you with a good faith estimate which details your transaction. You then call another lender to shop the deal and provide them with the good faith estimate you received from the first lender.
This provides the new lender with the ability to easily beat the other deal by lowering the rate by 0.125% to get you a better deal. A trained monkey can do this and it’s not fair to the original lender.
So, to avoid showing the new lender how to beat the previous lender, tell them what interest rate you were quoted and then compare the mortgage costs with the new offer. This way you will see who is honest and willing to give you the best deal. Otherwise, you are giving the new lender an advantage over the first lender.
At Michigan Mortgage Solutions, our goal is to provide with great service and a competitive interest rate. We rarely get rate shopped due to the high level of customer service that we offer. In fact, most of our clients do repeat business with us because of our no nonsense approach to meeting their needs.
We would love to earn your business and would be happy to provide you with a rate quote as well as complete your mortgage transaction so give us a call today at (248) 674-6450.
Otherwise, if youâ€™d like, you can learn more about the mortgage process and other pitfalls to avoid by reviewing the content Iâ€™ve created below. I hope you find this information useful and remember you can always call us if you have any questions or if youâ€™re ready to get pre-approved and get the process started.