A number of months ago I wrote about how interest rates were actually being calculated and how it was catching borrowers off guard when they applied for a mortgage. At the time, it was more about people who were calling in for those “low, low advertised rates” only to find out that due to their particular situation, the rates they received were much higher. I attempted to explain why people were hearing about rates in the fours only to find out that the final rates they received were in the fives.
I spent time explaining that this was due to the type of property, loan amount, credit etc. In other words, today’s mortgage rates are like going out to a specially advertised dinner at their local restaurant only to find out that the specially priced meal didn’t say anything about paying for the peas and potatoes or coffee and dessert. I now like to refer and compare today’s mortgage rates as similar to “a la carte dining.”
No matter how you cut it, it all comes down to the role that Fannie Mae and Freddie Mac or the government plays in pricing your mortgage interest rates. When a borrower applies, the lender begins with what I refer to as the base rate or that specially advertised “low rate.” Once the lender inputs the type of property, credit score, percent of equity being put down as a purchase or amount of equity held if a refinance, etc., the automated system which all lenders use will spit out the new defined rate. That is, the rate which due to Fannie and Freddie’s involvement, has a number of add ons built into the system. These add ons cause the rate to increase or decrease based on property type, credit, loan size etc.
For instance, if you’re purchasing a condo with a low down payment or you only have 10 percent equity for a refinance, or your loan amount is either under $125,000, $100,000 or $50,000, you will be hit by fees from Fannie Mae and Freddie Mac which are unknown to the borrower until application is made. This rude awakening has caught many borrowers especially investors buying property off guard.
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As an example, if you begin with a rate of 4.875 percent and you request a loan amount under $100,000, the fees in the system will likely push the lower rate to 5.25 or higher. If credit is under 720, it rises again. This can happen for any number of reasons related to the transaction.
What caused this to happen, you may ask. I suggest that you go back to the issue of Fannie Mae and Freddie Mac nearly collapsing and being bailed out by the government. You can now understand that they are trying to increase profits through any means. The most logical is to charge more. As most in the industry understand, rates would be much lower were it not for these back end fees charged by the nation’s two largest purchasers of home mortgage paper. At the same time, without either of them, we would have no mortgage market.
The moral of the story is to be prepared that the low advertised rate you hear on the radio or read in the newspaper may not be what you eventually end up with. This is not to say that borrowers who qualify with great credit, 20 percent down or equity and with loan amounts over $125,000, and with a single family home versus a condo or investment property will not reap the rewards of that “advertised low rate.” Like anything else in this world, if you fit that little round peg in the little round hole, you will receive the prize. In this day and age, it’s a low interest rate.
Joe Adamaitis, a mortgage consultant with Wells Fargo Home Mortgage, 1819 Main St, Suite 1000, Sarasota, can be reached at 363-5009.