Illinois Mortgage Rates and News

(This is an update of a previous blog post)

The one question I am asked more frequently than any other is, What is your rate? This is a great question because you obviously want the lowest rate, but it’s a question that is impossible to answer. First of all, the rate will depend on what type of loan you are getting, whether you want to pay extra money in points and fees to get the best rate (which is what happens with the low rates you see in ads). Even if you were comparing apples to apples and making sure the loans are priced the same way, you can’t compare mortgage rates without without taking into account all the factors in your personal situation which go into pricing a loan. When  a lender takes on a new mortgage their goal is to minimize their risk and make sure that they are getting paid for the risks they are accepting. Some loan characteristics increase the chance that the borrower will default on their loan, costing the lender money. Over the last year Fannie Mae and Freddie Mac, the buyers of most conventional loans, have instituted a whole new series of price hits called LLPAs or loan level price adjustments, based on situations they consider more risky. This means that loans that fit into these situations will cost more than other loans. These price hits can be paid as extra fees at closing, or by increasing the rate on the loan.

Here are some of the things that factor into the price of a loan, and how I price out my Illinois Mortgage Rates:

Credit scores – Fico scores are a measure of how likely a borrower is to pay back the loan. It used to be that if you qualified for a conventional loan (a loan that was eligible for purchase by Fannie Mae or Freddie Mac) your pricing would be the same whether your score was in the low 600s or the high 800s. If you didn’t meet these guidelines you could still get a mortgage at a higher rate, but these were considered Alt-A or sub prime loans. Now you will need a score above 780 to get the best interest rate and if your score is below 680 the price hits will be substantial (if your score is below 680 you may be better off with an FHA loan). In order to quote an accurate mortgage interest rate, we need to know your Fico score first. This makes it all the more crucial to review your credit and work on any problems before you are ready to apply for a loan.

Loan type – Even when comparing 30 year fixed rate loans, there are a whole variety of programs available, each to meet specific needs. The pricing changes based on the loan type. Conventional loans (Fannie and Freddie) are good up to $417,000 for a single family home. If your loan is above that you would most likely look at a Jumbo loan. Jumbo mortgages are not able to be sold to Fannie Mae and Freddie Mac and they are priced much higher. If you qualify best for an FHA loan, the pricing would be different.

LTV and CLTV – This means the Loan to Value and the Combined Loan to Value, or how much is the mortgage compared to the value of your home, and how much if you include any other mortgages on that home. This is another way of stating how much equity you have in your home – the higher the equity, the lower the loan to value. And the less equity you have, the higher the risk is to the lender. This is tied in with your credit score, and if you are buying with a lower down payment, this could make a big difference in your rate.  Are you buying with a second mortgage added on? In the past this has been a great way to buy with less money down and avoid mortgage insurance. It is harder to do in many cases now, and you may pay more on your first mortgage if you have a second loan attached.

Loan purpose – Are you buying a home or refinancing? If you are refinancing your home and taking cash out, it would cost you more if your loan to value is greater than 70% (less than 30% equity). A purchase or a rate term refinance would be priced the same.

Occupancy – Is this your primary residence, a second home or an investment property? You get the best rates and fees for your primary residence. Second home loans are often the same, but in some cases they can be slightly higher. Investment property is looked at as a riskier type of loan and investors are more likely to walk away from a bad investment, than home owners are on their homes. So there are higher rates and fees when you buy non-owner occupied or investment homes.

Type of property – Mortgages for single family homes are are priced better than loans for two, three or four unit homes. In one of the biggest changes, you will pay more if you buy a condo with less than a 25% down payment.  (Here is more information on Chicago condo loans)

Loan amount – On conventional loans, pricing is usually better for larger loans. It costs the same to process and close a small loan as it does for a larger mortgage. Because of this the pricing improves on loans over $200,000. On the other side, loans under $100,000 have increased fees, and the fees go higher as the loan price drops.

Property location – There are some areas in the city of Chicago and in the Chicago suburbs that are considered target areas. These neighborhoods are targeted for redevelopment and banks are encouraged to lend in these areas – more than encouraged, they have to have to lend a certain amount in low income areas or they could face big problems with the federal government. Because of this pricing in these areas is better. The original idea here was to offer more homes for low and moderate income borrowers. Often the areas marked for redevelopment are the hot areas where prices are rising. Make sure your loan officer checks to see if you are in a CRA or targeted area.

Buying out of state the pricing can be different, too. I specialize Illinois Mortgages, but also close loans in most states. The wholesale lenders have different rates for each state.

Length of the rate lock – You will get better pricing for a 15 day rate lock than if you locked your rate in for 60 days. The longer the rate is locked in for, the greater the risk to the lender, so they pass the cost of hedging the loan on to you.

Escrows – Mortgages are usually priced so that the end lender will hold your escrows for taxes and insurance, collect 1/12^th of the payment from you every month and pay the bills when they come due. Many borrowers want to pay these bills themselves and earn the interest on their money until the bills come due. You can do this if you meet certain guidelines, but it will cost you. Most lenders charge a quarter point fee if you waive your escrows. On a $300,000 loan this is an extra cost of $750.

Pre-payment penalty – If you know you aren’t going to be moving or refinancing for a while, you can sometimes get a lower rate by agreeing to pay a pre-payment penalty. This will lower your costs, but it also handcuffs you into staying in the mortgage. If you end up moving or refinancing before the time expires, it could cost you a lot.

These are some of the things that factor into the rate and cost of a mortgage. Even bigger though is how the loan fits your needs and what you qualify for best. It doesn’t make any sense to shop the rate on a conventional mortgage if you can only qualify for FHA. Also, make sure you look at the bigger picture, not only the interest rate but the costs of the loan and how the financing works for your personal situation.

Illinois Mortgage Rates                   First time home buyer loans  

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In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage . In the second part we talked about hidden fees and pre-payment penalties.  The third installment covered APRs and how important it is to know how to read a Good Faith Estimate of closing costs.. In this, our last installment, I’ll go over what may be the most important factor in choosing where you will get your mortgage, reputation and integrity.

So many people focus on getting the lowest mortgage rate, but the lowest quoted mortgage rate isn’t always the best deal. I’ve heard too many horror stories over the years of buyers who were promised one rate, but when they got to closing they found the rate was higher, the costs were considerably more, or the program was different than what they were promised. If you got the bait and switch at closing (it’s illegal, but it does happen) you have two choices. One, you can walk away from the closing, possibly losing your earnest money, or two, you swallow your anger and go through with the deal. The problem is that the loan officer knows much more about how the system works than the consumer does. The mortgage application process can be intimidating, and you are signing a stack of disclosures, most of which no one reads. What your lender told you may be different from the documentation you signed. Mortgage lenders who are behaving in this manner are obviously not looking for repeat business. The companies that play these games are looking for the fast buck and don’t care about your long term value as a satisfied customer.

The reputation of the company, and loan officer you are dealing with, will go a long way toward predicting what kind of experience you will have. How did you get the lender’s name in the first place? Where they recommended to you by someone you trust? Word of mouth referrals can be a great way to choose your lender, especially if they were recommended by a Realtor or real estate attorney who has lots of contact with different mortgage brokers and mortgage bankers. Ask your attorney what he knows about the company or loan officer you are dealing with. If the company is active in his market area, he will know the reputation of the company and how reputable they are.

You can also check with the better business bureau and the appropriate regulatory agency (As an Illinois based mortgage banker I am regulated by the Illinois Department of Financial and Professional Regulation. Mortgage brokers and federally chartered banks are regulated by different regulatory bodies) to see if they have had complaints lodged against them. Here is a link to sites and phone numbers where you can check for complaints. Also, run the company’s name and the loan officer’s name through a Google search. In some cases you will come back with a lot of information, in other cases it will show nothing but the company web site. Some other things to watch for when choosing your mortgage banker or broker are:

Does the company have a reputation for meeting its commitments and closing on time?

Is the loan officer experienced and able to answer your questions?

Does the company have the financial stability to stand behind its commitment?

Do they have the resources to meet the deadlines in the contract?

Do you feel comfortable with your loan officer?

Does he get back to you quickly, and does he (or she) follow through when he says he will do something?

These are all questions that should be part of your decision. Until you close, you will rely heavily on your loan officer. If you have a loan officer who doesn’t return phone calls, or one who doesn’t provide information, or doesn’t communicate well with you, getting your loan will be a frustrating experience. If someone is not responding during the process, can you be confident that you will close on time and with the right terms? Keep this in mind when choosing who you want to work with. The rate quoted is only as good as the integrity of the person quoting it.

Illinois Mortgage Rates and News

In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage . In the second part we talked about hidden fees and pre-payment penalties.  In this installment I’ll talk about some of the ways to compare mortgage offers and what you can do to protect yourself when shopping for a loan. Knowing what to look for, and what questions to ask, puts you in a position where you can make an informed decision.

APR – The APR, or Annual Percentage Rate, is a measure used to compare different loan options. The rate on the APR is always higher than the note rate, the actual rate you will pay for your loan. As part of the Truth in lending Act, the government requires that any time a rate is advertised, the APR also has to be shown. This is an attempt at transparency and the goal is to express the total cost of credit over the life of the loan, taking into account how much it costs you to take out the loan so you could tell which offer was better, a loan with a higher rate and lower fees, or mortgage with a lower rate but higher fees.

This concept is a step in the right direction, but it really doesn’t work as well as it could, and the result for most people it to leave them Dazed and Confused. There are a couple of problems with it. First, there is no one precise formula for determining the APR. Some costs are included in the calculation, and others aren’t, and there are some costs, such as application fees and mortgage insurance, that can be considered a cost under some circumstances, but not under others. And other costs, like pre-paid interest which can be manipulated to change your APR for the better. This means that the same loan, with the same closing costs, can show different APRs with different lenders.

Another problem with the APR is that it balances the cost over the entire loan period. For example, the closing costs on a 30 year loan would be averaged over the entire 30 year period, even though all the costs are paid up front. In the real world, very few people stay in a loan for the entire time. Let’s say you were comparing loans between two lenders and the closing cost on one was two thousand dollars higher than the other. Because you are averaging the costs over a 30 year period, the APRs would be very similar. But if you only stayed with that loan for seven years (with moving and refinancing so common the average time in a mortgage is closer to 5 years), it would turn out to be much more expensive than the lower cost loan.

Also, if you are going to compare APRs you need to compare with the same loan product. Comparing a 30 year fixed rate to a 15 year fixed won’t give you a true comparison, and comparing a fixed rate to an ARM will be of no use at all. Loan size matters too. The cost of fees on a large loan will have less of an impact than higher fees on a smaller loan.

The Good Faith Estimate: Many people focus on the loan’s APR, but the best way to shop is to directly compare the costs of one loan against another. To do this we use a form called The Good Faith Estimate of Closing Costs. This needs to be sent out to you after you’ve applied for a loan, but you should ask for it before you have committed to a lender. This form will show you the interest rate and program you are considering, a breakdown of your payment, a list of all the closing costs and pre-paids associated with the loan and a tally sheet showing the amount you will need to bring to closing. A lot of information is listed on the Good Faith, but when comparing loan offers the numbers you need to compare are the companies bank fees. Title charges, escrows and pre-paid interest can be changed around to show a lower bottom line, but the bank fees are the items that they can control. 

The Good Faith is an estimate, but it should be very close to the final numbers. Comparing offers takes more time, but it gives you a truer picture of what each lender is proposing. If a lender will not put his offer in writing, that should be a red flag that something may be wrong. In order to know what to compare, you need to understand what closing costs are spent on, and what to expect.

This still brings up the question of how you compare two offers if one has a lower rate but higher fees. To do this takes one more step, you need to figure your payback period. To do this you need to know how much the difference will be in your payments, and how long you plan on staying in the home. For example, say you are borrowing $200,000 and you have one offer of 6.25% with $1,000 in bank charges and another offer at 6.00% with $3,000 in bank charges. The payment at 6.0% is $1,199 for principal and interest. The payment at 6.25% is $1,231 – a difference of $32 per month. Now you take that $2,000 difference in up-front costs and divide it by the $32 difference in payments. This comes out to 62, which is the number of months before the lower payment will payback the higher fees you paid at closing. In this case it will be over 5 years before you break even – longer than that if you factor in the effect of inflation on your mortgage payments. If you are planning on being in your home for a long time and you don’t expect rates to drop at any time, this could make sense, but it shows that the lower rate isn’t always the best deal.

This approach takes a little more work on your part, but it gives a better picture of what option is best for your needs. In the next part of the series I’ll go over the one thing that may be the most important factor when shopping for a mortgage.

Illinois Mortgage Rates and News