Feeling overwhelmed is common when searching for a home loan due to the abundance of advertisements. How can you efficiently find the best rate amidst this saturation?
Don’t be fooled by big lender & online ads
It is common knowledge that low home loan "teaser" rates seen on TV and online can be deceptive. Lenders often promote a uniform rate with barely noticeable disclaimers or rapid verbal disclosures in TV and radio ads, which do not seem like complete transparency to me.
It's important to understand that the rate they advertise is typically the best possible rate for an ideal borrower and property situation. However, even if accurate, it's improbable that this rate will be applicable to you due to the many individual factors that can influence the rate for your specific circumstances and transaction.
Factors & qualifying criteria that impact your rate.
Considering this, here is a compilation of distinctive factors that will impact the interest rate you are offered. Based on this information, it would be extremely challenging for an advertisement to consider and incorporate these variables to give you precise details. A precise quote necessitates direct interaction between you and a loan officer. The accuracy of your rate quote increases with the expertise and integrity of the loan officer.
Relationship between Home Price and Loan Amount: The loan amount is determined by subtracting your down payment from the home price, which in turn influences the interest rate.
Initial payment: In general, a higher down payment percentage results in a lower interest rate. Interest rates are influenced by your loan-to-value ratio (LTV).
When refinancing: the interest rate is influenced by the loan-to-value ratio (LTV). LTV is determined by comparing the loan amount to the appraised value. Higher LTV ratios result in higher interest rates for conventional loans. However, the rates on government loans such as VA, FHA, and USDA are generally not affected by the LTV ratio.
Duration of the loan: Shorter durations (such as 15 or 20 years) generally come with lower interest rates compared to a 30-year duration.
Type of Interest Rate: Interest rates are typically classified into two main categories: fixed and adjustable (ARM). Fixed rates remain constant over time, while adjustable rates have an initial fixed period before being adjusted based on market conditions. For instance, a 5-year ARM mortgage will maintain a fixed rate for the first 5 years and then vary from the 6th year onwards. As of September 2024, adjustable rates do not significantly differ from fixed rates, unless the loan is considered a jumbo. In the case of a jumbo loan, ARM rates generally start lower than those of a 30-year fixed loan.
Types of loans: Various loan categories (Conventional, VA, FHA, and USDA) come with varying interest rates.
Credit score: Your credit score is determined by information from the three main credit bureaus: Transunion, Equifax, and Experian. Each bureau uses its own formula to calculate a credit score, often referred to as a FICO score, based on your credit history, credit utilization, and available credit. Lenders typically consider the lowest middle score when assessing borrowers.
Types of Properties & Usage The most favorable rate is usually offered for primary residences, followed by second/vacation homes, and then rental properties. Unique property types such as Condos, 2-4 unit properties, and manufactured homes generally have higher rates and may come with more stringent underwriting criteria. For these unique property types, it is advisable to consult with an experienced loan officer to receive precise information about loan options.
Another common problem with getting a rate quote--timing!
It is common to receive a quote from Lender A on Monday, Lender B on Tuesday, and Lender C on Wednesday. Interest rates can fluctuate daily, sometimes even multiple times within a day. As a result, if you do not obtain all your quotes simultaneously, you may not have precise, current information and could potentially select a lender with higher rates.
Some unscrupulous lenders (yes, they are still around!) intentionally provide lower rates on their websites to discourage you from continuing to search for better options. This is particularly common with purchase loans, as chances are you won't be able to secure that rate today.
THE ONLY RATE QUOTE THAT MATTERS IS THE DAY YOU LOCK
WERE YOU AWARE? You have the flexibility to choose any interest rate or total lender fee you prefer. However, it's important to note that adjusting one will impact the other. Opting for lower lender fees will result in a higher interest rate, while choosing a lower interest rate will lead to higher lender fees!
Caution is advised when a lender offers much lower rates and closing costs compared to others - if it seems too good to be true, it probably is! All lender rates are based on the same mortgage-backed securities (MBS) market, with larger lenders usually requiring a higher profit margin to cover their substantial operating costs.
Larger lenders have higher operating costs due to their size. This leads to them charging higher interest rates in order to cover expenses such as expensive television advertisements and sponsorship deals for stadiums. Companies like Rocket Mortgage, Loan Depot, NewDay, and others invest millions in advertising, which ultimately needs to be funded by someone, otherwise, they would face the risk of going bankrupt!
Smaller, well-managed lenders, such as mortgage brokers, are frequently more cost-effective compared to larger lenders, primarily because they operate efficiently with significantly lower overhead costs.
Crucial aspect
The total cost of your loan, consisting of the interest rate and lender fee, represents the wholesale price of money along with the lender's added markup or profit margin. It's important to note that both large and small lenders generally have similar wholesale funding costs.
The lender's markup, or gross profit, determines the interest rates they charge on any given day. This markup includes points, origination fees, and various additional fees such as underwriting, administrative, funding, and excessively high loan processing fees.
One way lenders boost their profits is by setting a significantly higher interest rate compared to the market average, despite offering very low lender fees. However, this inflated rate exceeds what is reasonable, resulting in more money going to the lender when the loan is finalized.
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