“What’s your Rate?”

I’ve been hearing that question a lot lately. If you are a rate shopper looking to refinance your mortgage (or if you just bought a new home and are looking to finance your purchase), this is probably the big question on your mind. But before I can quote a rate, I need to get some information, first. Some of the things I need to find out are:

What type of loan are you looking for? Is this a conventional fixed rate, an ARM, an FHA loan or a Jumbo loan?

What loan term are you looking for? In a refi market, like we are in now, many people want to keep their loan terms the same or pay their mortgage off quicker. The loan term is most often 30, 20 or 15 years, and the rate on a 15 year mortgage will be lower than a 30 year (but the payment will be higher).

How much do you want to finance? Mortgages are based on the size of the loan. There are price hits for smaller loans and price enhancements for the larger ones (up to the conventional limit of $417,000 for a single family home). So bigger loans are priced better than smaller loans.

Do you know your credit score? One of the big changes in the mortgage industry over the last year is that conventional mortgages rates are now linked to your credit score. The best rates go to those who have scores of 740 or better. Pricing is just a bit higher for those below 740 but above 700, but if your score is below 680 the hits can be big. FHA loans only have price adjustments if your credit score is below 600.

What is your home worth? What I’m looking at here is loan to value. If the mortgage is a high percentage of the value of your home this may affect your pricing. It also may mean that you would need to take on mortgage insurance. One of the realities of this market is that homes values have fallen. In some cases with the lower values, it doesn’t make any sense to refinance.

Are you taking any cash out? Depending on your loan to value, this can be another price hit. If you still have a lot of equity in your home after taking the cash out, it won’t matter.

Do you have a second mortgage or home equity loan? This matters for a few reasons. If you have a second mortgage and you are not planning on paying it off, we will need to subordinate it. This means the company that holds your second loan will have to approve the terms of the new first mortgage and agree to go along with the refinance. The risk to the new mortgage lender is that a second mortgage holder could try and jump into a first lien position while the new loan is closing, so we need to get an agreement anytime there is more than one mortgage. This used to be just a formality, but now second mortgage lenders are getting much pickier about what they approve, and what they won’t. If we need to get a subordination we need to allow for more time, and more time affects loan pricing. Also, if you took on the second mortgage after you bought the home, this is considered a cash out refinance, which may be another price hit.

What is more important, getting the best rate or keeping your closing costs low? The more you pay in points and closing costs, the lower the rate you will be able to get. But getting the lowest rate isn’t always the best plan. It can take years to pay off the extra closing costs based on the difference in your payments. This might be the right way to go, but if you don’t expect to be there long term, or if you think that rates could drop even lower, this might be a mistake. But many people have their eyes set only on getting the lowest rate. I talked with someone recently who was shopping rates and had just been quoted from a nationally known (big advertising) company. She was quoted an extremely low rate, but she would have to pay an additional almost $9,000 to get that rate. Focusing only on the rate can cost you money.

Do you escrow for your taxes and insurance? Many people would prefer to pay their own tax and insurance bills as they come due, rather than paying the mortgage company every month as part of your mortgage payment. If you have enough equity in your home this is an option, but there is a price hit for doing it. Some lenders charge less than others, but this is something we need to know upfront.

What type of property do you have? Fannie Mae recently changed their guidelines, and Freddie Mac is planning on following, so that condos will cost more to finance. This only applies if your loan to value is greater than 75% (less equity), but it means that condos are more expensive to finance than a single family home would be. The same thing goes for 2-4 unit buildings.

In order to get the mortgage that is best for you, we need to match the loan to your situation. Asking the right questions up front helps us get the situation right so you get what is right for you and avoid unpleasant surprises down the road.

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