What is Your Mortgage Handicap?

By now, you’ve probably heard about the record low mortgage rates. Yep, rates are at their lowest levels since 1971.

But that doesn’t mean you can just drive down to your local bank and get the interest rate Freddie Mac reports in its survey each week.

Currently, the popular 30-year fixed is averaging 4.71% nationwide, with an average fee of 0.7 mortgage points (a mortgage point is one percent of the loan amount).

This reported rate, which is typically also the rate you’d see advertised in the paper or on a website, is known as the “par rate,” because there are no adjustments to the rate or associated costs other than the upfront fee for loan origination.

Aside from that fee, which will surely vary based on where you apply for a loan, other mortgage pricing adjustments exclusive to your loan scenario will need to be factored in.

Risk-based factors such as loan amount, credit score, loan-to-value, transaction type (purchase or refinance), documentation type, property type, occupancy, number of units, and so forth must be accounted for.

Freddie Mac bases their interest rates on conforming loan amounts with a loan-to-value (LTV) of 80% or less.

So if you’re borrowing more than the conforming loan limit ($417,000) at say 90% LTV with a less-than-stellar credit score, don’t expect to receive the rate you see advertised.

For all that extra risk, you’ll be subject to a higher interest rate.

Conversely, if you’ve got an 800 Fico score and a low LTV, say 65%, you may qualify for pricing adjustments that could actually lower your rate below what is currently being advertised.

Also keep in mind that you may end up with an interest rate higher than the par rate even if your particular loan scenario doesn’t call for any pricing adjustments.

If this is the case, the loan officer or mortgage broker will make money on the interest rate spread, though they may do this intentionally so you don’t have to pay any out-of-pocket costs.

Mortgage rates can be manipulated quite a bit, so be sure to inquire about all pricing adjustments and have your loan rep clearly explain how they arrived at the given interest rate offered.

(photo: thetruthabout)