There are so many factors that can affect the final mortgage interest rate for the customer it is better not to mislead them. The purpose of this article is to try to explain some of the variables that can affect the final note rate that appears on the borrower’s final closing documents.
Starting with the most bread and butter commonly used loan program, a conforming Fannie Mae loan, we have many adjustments to consider. As a consequence of the mortgage meltdown Fannie Mae introduced risk based pricing a few years ago to try to make a little money. Various hits to pricing are now in place based on the type of loan and credit score. Now, we have negative incentives for cash out refinances and “hits” to pricing for every level of credit score. It used to be a person with a 660 middle credit score received the same mortgage rate as a person with a 760 score. Now we have different levels of negative adjustments for credit scores under 680, under 700, under 720, under 740. Then we go to another matrix that takes into account loan to value and the type of loan. A 50% purchase has better pricing than a 70% rate/term refinance which has better pricing than 80% cash out. To make our head spin a little more we have few more adjustments for loan size and escrow waiver.
Once we have established where the loan falls in the pricing matrices, we have conquered the easy part. Now we have to take into account the unknown which is the world economy. We have to weigh all of the noise we digest everyday on the state of our economy and the general trend in current mortgage rates. Then we have to factor in the way we receive our pricing. Lenders provide slightly better pricing based on the length of the lock period of the interest rate. This is their hedge on the unknown of the markets. A 15 day lock has better pricing than a 30 day lock has better pricing a 45 day lock. We also have to take into account time frames and estimated closing dates so penalties are not levied if we need to extend the lock later on.
Taking all of these factors into account it is necessary that the customer and myself understand the strategy we are going to take with regard to the locking of the interest rate of their loan right from the beginning. Are we going to lock the interest rate in the beginning of the process and be secure or are we going to roll the dice and try to take advantage of market fluctuations and a short term lock at the end of the process. Current mortgage rates change twice a day every day so this could be quite a roller coaster ride.
Finally, behind the scenes the mortgage broker has to take into account his or her relationship with the end servicer. Lenders typically monitor pull through ratios to make sure when a broker locks a loan they deliver it. Loans that are not delivered cost the end servicer money on the secondary market and they will in turn give the mortgage broker a little slap on the hand or cut off the relationship completely.
After working in the mortgage business for 16 years and having learned from my mistakes, I know one of the most important discussions I have with any customer is the logic behind locking their mortgage rate on any given day. Hopefully, we end up on the low end of the range that I quoted 30 days prior.
Written by Preston Ware
First South Mortgage
Email is email@example.com.