Why Can’t I Get the Best Mortgage Rate?

Why Can’t I Get the Best Mortgage Rate?

So you heard your neighbor brag about his new 4% thirty-year rate? Or maybe you just read an article describing how rates have dropped to historic lows, or you heard a local mortgage company advertise 4% rates.

But when you call to apply you’re offered a rate of 4.125%. You’re shocked. After all, you have excellent credit. You have a solid job history. And you owe less than seventy-percent of your home’s value.

So why can’t you get the lowest mortgage rate advertised?

Best Case Scenario vs. Risk-Based Pricing

First, the lowest mortgage rates are typically reserved for best case scenario loans. These are loans that carry the smallest risk of default. A best case scenario loan typically has:

  • Loan-to-value (LTV) under 60%
  • Credit score over 740
  • Loan amount under $417,000
  • Debt ratios under 41%

Mortgage companies and banks usually advertise rates based on this best-case scenario or one similar. Once a lender takes your application they will access price hits for anything outside these parameters. This is called risk-based pricing. These hits can negatively affect your rate.

Different Rates for Different Programs

Your loan program can also affect your final rate. Conventional programs (Fannie Mae, Freddie Mac) have different risk-based price adjustments than government programs (FHA and VA).

For example, a credit score of 680 combined with an 80% LTV on a conventional loan will result in a higher rate than a FHA loan with the same criteria. While 680 is considered “A” credit, it is a third-tier score on the conventional score-card. And while having an LTV of 80% might allow you to avoid mortgage insurance, it is the highest LTV allowed on cash-out conventional loans. Therefore, risk-based price hits are accessed.

FHA programs simply don’t have the same price hits as conventional programs. They require mortgage insurance which helps to offset a lot of risk. So in the example above, an FHA loan will most likely have a lower rate.

Many banks and lenders offer their own portfolio programs too. These programs are usually created to help fill a niche in the market place. They typically expand beyond the conventional and government guidelines. Consequently, the rates can be a little higher than conventional and government loans.

Different Rates from Different Lenders

Finally, rates can differ from lender to lender. Lenders and banks all have money built into their rates. They all start at basically the same point, but then increase their rates in order to collect a service release premium (SRP) when they sell the loans on the secondary market. This is why bank rates can differ from one institution to another.

Brokers have the distinct advantage of being able to offer rates from multiple banks and lenders. This allows them to compare lender rates daily and offer their clients the best possible rates available.

A Word of Advice

In this post- meltdown environment, risk-based pricing is more strict than ever. With a back-log of foreclosures still on their books, lenders and banks want to ensure that new loans perform well (payments are made on time). This is one reason why it’s tough, even for “A” credit borrowers, to obtain credit at the lowest rates.

It’s important not to split hairs here, though. Often the difference in a 4% rate and a 4.125% rate is negligible. While you might lose out on bragging rights with your neighbor, you can still obtain a lower rate today than at any time in history. In fact, rates are so low that you may never need to refinance again.

Our advice is to apply with a couple lenders, compare rates and programs, and make a decision. Shopping or holding out until you get that one rate you heard advertised on the radio just doesn’t make sense. There is such a thing as paralysis by analysis. Don’t let these rates pass you by. Act now.

Compare HARP Refinance Rates

Compare HARP Refinance Rates

The Best HARP Rates

HARP refinances are deemed riskier than other mortgage loans. But HARP refinance rates are still very low. In fact, in many instances, HARP rates are equal to or better than the average market rates for conventional loans.

This means that it is possible for a homeowner to borrower more than the value of their home with a HARP refinance for the same low rate as someone who has more than 20% equity in their home.

Beware of Banks Charging Higher HARP Rates

Banks and Lenders have always offered varying rates and fees on all loan products. But the degree to which some lenders have increased their HARP refinance rates is puzzling. We have seen plenty of examples where banks offer their existing clients HARP rates that are significantly higher than the average market rate. It is as if they think that these homeowners cannot go elsewhere.

Homeowners should know that their existing lender is typically not their only option when it comes to HARP refinancing. Homeowners should always get another quote to compare to their existing lender’s HARP rates.

HARP Refinance Rates Can Fluctuate

There are legitimate reasons why HARP refinance rates may exceed the market average.

First, Fannie Mae offers expanded level HARP approvals. If a loan is HARP eligible but is deemed too risky for a regular HARP approval it may still qualify for an expanded approval (EA). Each EA level represents a higher risk. HARP refinance rates increase as the EA level increases.

Many banks and lenders do not offer EA level HARP loans. They will simply turn down a homeowner who does not get a straight HARP approval. This is another reason why getting another offer is so vital.

HARP mortgage rates can also fluctuate because of lender overlays. Some lenders have pricing hits for loans over a certain loan-to-value (LTV), debt-to-income ratio (DTI), or under a certain credit score. These pricing hits can result in higher HARP refinance rates.

Each bank that you apply with should get the same approval level when they run your application through an automated underwriting system (AUS). And while rates may vary slightly due to lender overlays, they should never be too far apart. But all too often, homeowners are being quoted inflated rates by their existing lenders.

Always Shop Your Current Lender

Homeowners should always shop their existing mortgage lender in order to obtain the best HARP rates. This cannot be understated. Many big mortgage services, banks and credit unions simply do not offer the best HARP refinance rates. Some may simply charge higher rates due to the higher perceived risk. Others see an opportunity to collect more interest on homeowners who might think they have nowhere else to turn.

Meridian Home Mortgage is proud to offer these homeowners a legitimate alternative. We continually beat other banks and lenders with lower HARP rates and fees. We offer all HARP approval levels and pride ourselves in educating homeowners on all of their HARP options.

Call today to speak with one of our Loan Officers.