So, you want to get a lower mortgage rate? Don't we all! By reading this article you will understand what goes into a mortgage rate quote, and some actions you can take in order to get that lower mortgage rate!
There are many parameters of a mortgage rate quote. We will look at these parameters, break down the options within the parameter, and discuss some actions you can take to get that lower rate!
There are three types of property occupancy; primary residence, second home (often a vacation home), and non-owner occupied (usually a rental property).
A primary residence will usually have a lower rate offered than a second home or non-owner occupied property. A second home generally will have a lower rate than a non-owner occupied property.
*Action to take* - Make sure you are clear about the occupancy of the property when speaking to a lender. If you want to finance a second home, make sure you ask the lender what the parameters are to be qualified as a second home (there are generally guidelines in terms of whether the property is located in a vacation area and/or how many days the property has been rented out in the past if it is a refinance).
Your loan amount has an affect on the interest rate. Very low loan amounts often cause an increase in the interest rate quote. Lenders have costs to fund a loan. In order to cover costs, lenders can either raise the rate or the fees charged to cover these costs.
Larger loan amounts can also cause the rate to increase. Larger loan amounts can carry higher risk for a lender, so the lender may compensate for that risk by increasing the rate.
*Action to take* - Ask the lender if the rate would be any lower if you increase the loan amount if you are pursuing a smaller loan, or if you decrease the loan amount if you want a big mortgage.
The loan-to-value (also known as LTV) is the percentage the loan amount is compared to the value of the property. Generally speaking, a lower LTV percentage will get you a lower interest rate than a higher LTV percentage will.
Lenders typically differentiate their interest rate quotes in 5% LTV increments. For example, a 75% LTV may offer a lower rate than a 80% LTV.
*Action to take* - Ask your lender if the rate will decrease if you make a larger down payment on a purchase, or reduce the loan amount on a refinance. Ask them what the difference in rate will be. It may or may not be worth it, depending on the rate difference.
There are three purposes for a mortgage - purchase, rate and term refinance, or cash-out refinance.
A purchase mortgage is self-explanatory, it is a loan to purchase a property.
A rate and term refinance is a refinance when the borrower benefits from either reducing the rate and/or reducing the term of the loan.
A cash-out refinance is when the borrower increases the loan amount above the current amount to turn equity into cash to use for other purposes, such as financing home improvements.
Generally speaking, a rate and term refinance will be offered at a lower rate than a cash-out refinance will.
*Action to take* - If you are purchasing a home, ask the lender if the rate is discounted for a purchase. Lenders often offer "Purchase Specials" to attract purchase business.
If you are pursuing a cash-out refinance, ask how much the rate is increased for cash-out. You may be better off obtaining the cash-out with an equity line of credit either closing at the same time as a new first mortgage, or after you close a rate and term refinance.
An impound account (also known as an escrow account) is an account on deposit with the lender that pays the taxes and homeowner's insurance for the borrower when these become due. The borrower deposits approximately 1/12th of the total amount due each month into this account by adding this amount to his mortgage payment.
Lenders often offer a discount when an impound account is set up at the closing of the loan.
*Action to take* - ask the lender if they offer a discount for an impound account, and how much the discount is. After receiving this information, make a determination if an impound account makes sense for you.
Your credit score plays a huge role in determining the interest rate you will be offered. Lenders often set their rates based on the qualifying credit score in 20 point increments. For example, differentiated rates may be offered with. For example, their pricing models may show rates with a score of at least 680, 700, 720, and so on.
*Action to take* - Find out what your qualifying credit score is. Ask the lender if there is any decrease in the rate with a higher credit score. You may be able to increase your score with a "Rapid Re-Score".
For the purposes of this article, there are two types of income documentation: full documentation and alternative documentation.
Full documentation is the traditional method of documenting income - providing paystubs, W2 forms, and/or income tax returns.
Alternative documentation generally means providing other types of documentation to verify income, such as bank statements for anywhere from 6 months to 24 months.
Generally speaking, clients who provide full documentation will be offered lower rates than those who provide alternative documentation.
*Action to take* - Discuss with your lender if you can qualify providing full documentation. If you can, you will usually be rewarded with a lower rate!
The debt-to-income ratio (also known as DTI) is the amount of monthly debt compared to the gross monthly income of the client.
A lower DTI may make the the difference in qualifying for a loan program that offers a lower interest rate than another loan program a lender offers.
*Action to take* - Ask the lender if the rate can be decreased with a lower DTI. If it can, some possible actions to lower your DTI includes decreasing the loan amount and/or paying off a debt, such as a car loan or credit card.
The type of property can affect the interest rate. There are basically three property types in deriving a rate quote: a single family residence (also known as SFR), a Planned Unit Development (also known as PUD), and a condominium.
Generally speaking, a SFR and PUD will have a lower interest rate offered than a on a condominium. In some cases, a PUD will have a higher rate than a SFR.
*Action to take* - Ask the lender if a different rate is offered for these three property types. The difference may help you determine which type of property you are going to pursue purchasing.
Number of Units
The number of units attached to the property has an affect on the interest rate. In this article we are specifically targeting 1 to 4 units.
Generally speaking, a property with one unit will have the lowest interest rate. A property with two units generally has a lower interest rate than a property with 3 or 4 units.
*Action to take* - Make clear to the lender if you are interested in financing a multi-unit property. Lenders usually default to quoting for 1 unit because that is the most common number of units financed. Better to be safe than sorry and having a surprise later that the rate is higher!
The location of the property may make a difference in the interest rate available. Lenders may offer discounts if the property is located in a certain location. It may get very specific, such as being located in a certain census tract in a certain city!
*Action to take* - Ask if the lender offers a discount to the rate based on the location of the property.
Generally, there are two different types of mortgage payments you can make: a principal and interest payment, or an interest-only payment.
Mortgages set up with an interest-only payment generally have a higher rate than a mortgage set up with principal and interest payments.
*Action to take* - Ask the lender if the rate is any lower with a principal and interest payment than an interest-only payment, and find out how much the difference is and what the payment difference is. Use this information to help you determine the best payment type for you.
There are basically three categories of conventional mortgages: conforming, high balance, and jumbo. These categories are based on the loan amount.
Here in the San Francisco Bay Area these maximum loan amounts for a single family residence are $424,150 for a conforming loan amount, $636,150 for a high balance loan, and any amount above $636,150 is considered to be a jumbo loan.
Each of these categories have their own set of interest rates that lenders offer. Please be aware that a loan amount between $424,200 and $636,150 can be considered a jumbo loan in some instances.
*Action to take* - If your loan amount is flexible, and/or in the high balance category, get the rates for more than one category. The difference in rates, if any, can help guide you to the best loan amount for you.
Points (also known as discount points and/or origination fees) are a percentage of the loan amount paid at closing.
Generally speaking, paying points can lower your interest rate. Lenders usually have a matrix of rates and the associated points offered with each particular rate,
*Action to take* - Ask the lender to offer you several rate and points options for the loan program you choose. With some simple math you can make a determination what option makes the most sense for you.
The loan term is the length of time the lender is allowing you to pay the loan back. Generally speaking, shorter loan terms offer lower rates than mortgages with longer terms. However, loans with longer terms offer lower payments given the same interest rate. Lenders usually offer loan terms in 5 year increments.
*Action to take* - Ask the lender what the rates and payments are for different terms. Withi this information you can make an assessment as to which term works best for you.
Rate Lock Period
The rate lock period is the length of time the quoted rate is guaranteed for. Rate lock periods generally range from 7 days up to 180 days. Generally speaking the rates will be lower for a shorter term rate lock than a longer term rate lock.
Closing your loan within the rate lock period depends on great communication and cooperation between you and your lender. Make sure your lender has the reputation of being a great communicator, and do your part by supplying any documentation requested in a timely manner.
*Action to take* - Ask the lender how quickly they think they can close your loan, and then ask for the rates associated with that time period. You may want to ask what the difference in the rate is for a longer rate lock period. With that information you can determine whether it is better to be safe with a longer rate lock than being sorry if your loan does not close on time!
Adjustable Rate or Fixed Rate
Generally an Adjustable Rate Mortgage (also known as an ARM) will have a lower rate than a fixed rate mortgage, given that they have the same loan term.
Another generalization is the shorter the fixed rate period of the ARM, the lower the interest rate.
*Action to take* - Ask the lender for the rates for both fixed and ARM loans. make an assessment of the best type for you based on the rate, fees, payments, and how long you expect to own the property for.
Well there you go! Only 17 parameters to talk to your lender about to get a lower mortgage rate!
Is your property located in California? Watch this video:
Do you need help with or a question about a mortgage? Call or text me at (650) 222-0386, or e-mail me.
Guarantee Mortgage is a division of American Pacific Mortgage Corp. Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, and the California Bureau of Real Estate. American Pacific Mortgage Corporation NMLS #1850, CAL-BRE #01215943. Single Family, Multi-Family and Commercial Loans. Equal Housing Opportunity. Equal Housing Lender.