Five reasons near-record low rates are out of reach for some
CHICAGO (MarketWatch) — Mortgage rates are near historical lows, but the rates lenders are quoting you aren’t as eye-popping as those you see in the news.
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First, remember that mortgage rates are moving constantly, and rate surveys are capturing rates from past points in time. For example, Freddie Mac’s weekly survey collects rate data over the course of a week. Bankrate.com’s survey collects rate data every Wednesday.
By the time results are released, they’re already outdated.
There are other reasons your rate might be higher. Below are five of them.
1. You’re not paying points
Average rates in Freddie Mac’s survey include average discount points paid for the mortgage. But not everyone is willing to pay points.
For the week ending Oct. 27, rates on the 30-year fixed-rate mortgage averaged 4.1%, but that rate required an average 0.8 point to get it. A point is 1% of the mortgage amount, charged as prepaid interest.
Unless you’re going to live in your home for a very long time, paying points often doesn’t make sense, said Greg McBride, senior financial analyst for Bankrate.com.
“Where the investment pays off is if this is a loan you’re going to have for a long period of time. You’re making an investment of money now to pay the points to get the benefit of a lower monthly payment for years to come,” he said. “The more years you have of that lower monthly payment, the greater return on that initial investment of points.”
Bankrate’s weekly survey includes as many zero-point loans as possible, McBride said. That’s another reason that rates in Bankrate’s survey are different than those in Freddie Mac’s, he said. The 30-year fixed-rate mortgage averaged 4.33%, but points required to get that mortgage averaged 0.42, according to the Bankrate survey released Oct. 27.
2. Your borrower characteristics mean price adjustments
A credit score on the low side will prevent you from getting the lowest rates. Low levels of home equity will also mean a pricier mortgage rate.
That’s thanks to loan level price adjustments from Fannie Mae and Freddie Mac that have been making it tougher for borrowers to get the best rates for the past few years.
“The further down the FICO realm you go, and the higher the loan-to-value ratio, the more cost for the consumer,” said Cameron Findlay, chief economist for LendingTree.com, an online network of lenders.
Those with credit scores below 700 will have a tough time getting the rates in the low 4% range that everyone has been talking about, McBride said.
Meanwhile, a 20% equity cushion in your home for a refinance, or down payment for a purchase, is what’s needed to get the best rates these days. And if you have a jumbo mortgage, lenders usually want 25% or 30% down for the best rates, McBride said.
However, borrowers who qualify for the newly revamped Home Affordable Refinance Program will be able to snag low rates, even if their equity has taken a severe hit.
3. Your property type means higher rates
For condo-unit mortgages, you need a 75% loan-to-value ratio, or a 25% equity position, to get the best rates, said Christopher Randall, vice president, secondary marketing, at the Real Estate Mortgage Network, a mortgage lender.
And if your mortgage is for a vacation home or investment property, you can also expect to pay a higher rate, McBride said.
4. You don’t have recent proof of income
For the self-employed — who don’t have pay stubs as proof of recent income — the most recent tax returns are what a lender will look at before giving you a mortgage. If business has improved after your past tax return, that’s not going to be of any help as you try and get a mortgage today.
“Business could be off the charts now, but if the tax returns tell a different story, then getting approved or getting the best rates becomes a problem,” McBride said.
5. Your lender isn’t hurting for business
There can be a big disparity in what rates are offered from lender to lender, Findlay said. And it may have to do with how many mortgages they’ve been originating lately.
“Some that are lacking volume will tend to be more competitive,” he said. “Those that have enough volume may say we’re going to keep rates high.”
But the rate isn’t everything, Randall said. When shopping for mortgages, borrowers need to focus on comparing their monthly payments. “People are drawn to the interest rate… but you have to look deeper. Review the documentation,” Randall said.
For instance, it’s possible for someone to get an offer of a very low rate on a mortgage backed by the Federal Housing Administration — that loan also may come with a higher insurance premium, Randall said. That person may be better off taking a conventional mortgage with lower priced private mortgage insurance, even if their interest rate is a little higher, he said.