The Secret to Getting the Best Rate: More than Timing the Market
Wednesday, January 14, 2009 at 12:48 pm
Rates are not the only consideration when shopping for a mortgage. But they get all the attention.
Consumers often compare mortgage rates as if they were shopping for the best deal on a DVD player or a trip to Mexico. But borrowing money is an entirely different endeavor because a consumer’s individual financial profile directly affects the terms of the loan. Banks aren’t selling 60″ plasmas, they’re investing in real estate. And like all other investments, the transaction involves a certain amount of risk. After all, when lending money, banks are looking to minimize risk.
The best loan candidates garner access to the widest variety of programs at the lowest rates - and two seemingly similar loan candidates can lock-in different rates.
Why is this?
Knowing methods lenders use to evaluate risk factors will give you a better understanding of how rates are determined - and how you can become the ideal mortgage candidate.
Credit
Lenders reward borrowers who can verify strong longstanding credit history with timely payments across several credit lines. While a 680+ score used to be the top range, lenders have raised the threshold to 720, giving even higher rewards to 740+ candidates.
Equity
Lenders offer premium rates to borrowers who are more financially vested in their property. 20% equity (or down payment) enables borrowers to forego a second loan or private mortgage insurance, and shows a solid commitment to retaining the property. 40% equity / down payment (and above) can yield an even higher reward with access to better rates.
Income
Lenders prefer borrowers with a steady paycheck. Self-employed or commission-based borrowers must furnish tax returns from the previous two years in order to demonstrate a steady stream of income. The same applies for borrowers who own their own businesses.
Escrow
Property taxes exist in the first lien position. Essentially, the government is “always at the top of the list” and must be paid first for you to maintain proper title and ownership of your property. Lenders prefer to pay your property taxes directly to the government to ensure timely payment and to protect their investment. Adding tax escrows to your mortgage payment increases your monthly balance, but it’s a stress-free way to save for your bi-annual tax payments.
Residence
Home is where the heart is – and lenders price rates on primary “owner-occupied” residences lower than those on vacation homes or rental properties. Banks minimize their risk because borrowers are more likely to maintain their immediate surroundings rather than a property they visit infrequently or rent to others.
Loan Amount
Fannie Mae and Freddie Mac insure conforming loans. In the State of Illinois, the maximum conforming loan amount is $417,000 (and has been since January 1, 2008).
Loans above $417,000 are not insured by these government agencies. While it would make sense that lenders want you to borrow “more” in order to increase their return on a larger principal, they’d actually prefer to decrease their risk and value an insured investment over a larger, more profitable loan.
Purpose
Often times, a lender will consider the “loan purpose” as a risk factor when determining lending guidelines. For example, if you’re refinancing your loan to obtain cash (i.e. a “cash-out” loan), your interest rate might be slightly higher. If you’re refinancing a first and second loan, a lender will offer slightly higher rate if your home equity line of credit or “second” loan was secured after your home purchase.
Knowing these factors will help you understand why there isn’t just a universal interest rate for every single borrower – and why you might garner a different rate than your neighbor, co-worker or even your spouse.
Consult with mortgage advisor at least once every year to review your mortgage and to learn if you can capture a better rate or adjust your program as your own financial needs change. If you’re thinking about selling or refinancing, check your credit for any erroneous claims and to ensure that your bills are up to date.
You are invited to learn more about the first-time homebuyer credit.
