Hudson Valley Musing

 

Why is the rate I see advertised always different than the rate I get?

 

You really didn't think you were actually going to get that rate did you?

Best way to start this conversation is by telling you that companies want to advertise their absolute lowest rate.  The rate advertised is available however few people meet the minimum requirements to get that low rate.  12 day lock period, 60%LTV 760 FICO score etc.

 

You should also know that no two borrowers are alike.   If your neighbor got a higher rate than you it doesn't necessarily mean he got a bad deal.  Several factors are considered when determining what you get as a final interest rate.  We call these factors: Risk based adjustments.  These adjustments are made based on the amount of risk that is being taken by the lender.

 

 

The most common risk based adjustments are:

 

• Loan to value  
• Debt to Income Ratio  
• Credit Score  
  
• State the property is located
  
• Loan amount 
• Combined Loan to Value 
• Escrow waiver  
• Lock period 
• Cash out   

 

All of these will either raise or lower the cost of your loan. 

*Your neighbor may have had a high debt to income ratio whereas yours was low so that could have raised his interest rate even though you both may have the same credit rating.

 

 

Here is an example of what adjustments look like on a mortgage rate sheet

 

The word Agency means Fannie Mae and Freddie Mac.  These are the companies aka "GSE's" that buy the loan from your bank.  They impose many of the adjustments you see and end up paying for.

The numbers to the right are what we call "pricing" adjustments, meaning the rate can remain the same but it will cost the customer more or less money to get it.

The numbers you see are in percentages.  Example: .125 means a cost of .125% of the loan amount. A minus sign in front of the number means a credit, so  -.125 means a credit back to the borrower of .125%.

Example:

$200,000 loan amount .125% would be $250 cost to the borrower and  -.125 would be a credit of $250 to the borrower to get the quoted interest rate.

 

If you have a lot of these adjustments it will push the cost of the rate you are targeting higher or lower.

Lastly, you need to know that rates do not remain the same.  They can and often do change throughout the day.  It is not uncommon to have rates change more than once during a workday.  This adds to the reasons why the rate advertised may not be what you get. 

Click on video below to understand how rates change.  Click here to contact me with any questions.

 

 

 

 

 

How to Shop Mortgage Rates

View this in 1080 HD  by clicking next to "CC" at bottom

 

 

 

 

 

 

 

 

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I originated mortgage loans from about 2002 until 2006 or so. I considered starting my own mortgage brokerage but decided against it for several reasons, including the growth of my real estate company and the vast changes in the industry after the sub prime crisis. That required more learning than I could spare if I wanted to properly manage my real estate brokerage. I no longer originate mortgages. However, I do know the difference between interest rate and APR.

For most of my time in the industry I worked for brokers, not direct lenders. They seemed to me to have more flexibility in placing loans. My first company said that applicants who made one application with her had dozens of options whereas anyone who applied with a local bank had but one. In 2002, that made sense. It no longer does. Changes in the laws of the land, especially here in New York, have marginalized mortgage brokers and given large direct lenders an advantage in the market place. The reasons why are for another post; the fact is that consumers who use a broker need to know some things. 

First, mortgage brokers are not able to make loans. They place them with 3rd parties. This is  not bad, but it does make a pre approval from a broker a lie. Mortgage brokers can issue prequalification letters. They cannot issue a pre approval letter. They can't loan. As a matter of fact, New York compliance regulations stipulate that mortgage brokers state that they place loans with 3rd parties on their letters. You'd be surprised how many do not. DUMB. 

Second, mortgage brokers have to disclose what they are earning on a loan (otherwise known as yield spread premium). Bankers do not have to disclose this. Fair or not, it is the law. While pricing is not firmed up until you lock your rate, it is important that you as a consumer get a good faith estimate at the time your application is made. Too often, I have dealt with buyers who did not like their closing statement, and when I asked them what their GFE (good faith estimate) said, they told me that they never got one. It was coming. They couldn't get it right away. The dog ate it. In any case like that, they were victims of an unethical practice. 

In New York, many good brokers have gone out of business. Public perception has put more confidence in banks, and brokers have borne the brunt of the economic downturn with the sub prime meltdown and so many stories of fraud in the news. You would think that this would make the existing brokers more mindful of watching their Ps and Qs, but in my experience, the opposite is the case. With one notable exception in my experience, mortgage brokers have not adapted to the new environment, causing suspicion and uphill battles.

I still get bogus preapproval letters with no compliance verbiage on Microsoft Word forms. This makes getting an offer accepted really hard for the borrower, who has no idea that they are at a disadvantage. I still get assertions that a borrower is a "slam dunk" from originators at brokerages, and when I ask what the Desktop Underwriter findings were for the borrower I get a blank stare. Desktop Underwriter, or DU, has been the industry standard for both bankers and brokers in automated underwriting. It isn't foolproof but it is an indication of accuracy and thoroughness. If a borrower hasn't been submitted to DU without a really valid reasons they are a huge question mark. 

Caveat emptor to both buyers and sellers. Find out who is vetting the prospective buyer/borrower, because that can be the difference between a good sale and a long drawn out non-deal that wastes weeks and months. 

 

• We Are Westchester County, NY Real Estate. Reach Phil at (914) 723-8900.
• J. Philip Faranda, Broker-owner, J. Philip Real Estate, LLC. 2010 Vice President, Westchester-Putnam Multiple Listing Service. 
• I am one of New York's premier short sale REALTORS. 
• J. Philip Serves Briarcliff Manor, Ossining, Croton, the River Towns, Westchester County, and the bedroom counties of New York City.
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