Why Your Mortgage Might Cost More Than You Expect
Applying for a mortgage? Do your fees and rates appear to be a little higher than what you see advertised? If yes, there could be several key factors driving up the cost of your mortgage that you may not know about. These additional mortgage-pricing factors can make your mortgage cost more. Don't be fooled by a lower-priced mortgage offer if your financial picture contains any of these key cost-drivers.
1. Credit Score: Most lenders have a credit threshold of 740 or above. If the middle of the three credit scores the lender pulls is under 740 -- even if it's 739 -- you could be paying slightly more in terms of interest rate and/or associated costs with your new mortgage application. If you attempt to raise your score by opening up new credit or paying off debts, it may or may not help you, depending on your credit history. (Besides, opening new lines of credit too soon before you buy can be seen as a red flag by%VIRTUAL-pullquote-If a lender requires a pay stub or a bank statement, get it to them quickly.% lenders, which can hurt your chances of getting a mortgage.) Sometimes your best score is a byproduct of how you've managed your liabilities over time.
2. Equity: This one is a biggie, particularly with conventional mortgages, loans not insured by the Federal Housing Administration, U.S. Department of Agriculture or U.S. Department of Veterans Affairs. The cream of the crop conventional loans can become very pricey if you have less than 25 percent equity and a low credit score, particularly if your score is under 700.
3. Occupancy: If you are financing a property that is not your primary residence, such as an income property/investment property, expect to pay more right out of the gate no matter what your loan-to-value or your credit score. It's not uncommon to see as much as .375 percent higher in rate for income property financing combined with these other risk factors.
4. Loan Size: Let's say you have great credit -- say 740 or above -- and you take out a $160,000 loan on a primary home with 25 percent down. Believe it or not, a loan amount of $200,000 with the same factors will be more competitively priced. Contrary to popular belief, mortgage giants Fannie Mae and Freddie Mac have an appetite for bigger mortgages -- usually at $170,000 or more -- than they do for loans under $170,000. Therefore, Fannie and Freddie price these smaller loans slightly higher, as the interest they collect on monthly payments is below their margins.
5. Co-Signer: Freddie Mac loans are the only loans on the conventional side (non-government) that allow for the use of a co-signer or even a non-occupying co-borrower to help offset a mortgage payment. Freddie Mac inherently prices its loans a bit higher than Fannie Mae loans, but offer this loophole.
6. Time Frame Delays: An interest rate lock extension, if not handled in a timely manner, can be a strong driver of cost. Interest rate lock extension fees can be as high as .375 percent of the loan amount. For a $400,000 loan that's an additional $1,500 for an extra 30-day period of time, while you can expect half that amount for a shorter delay. Lock extensions typically can be for 15 days, or 30 days with most lenders. Want to avoid a time frame delay? If a lender requires a pay stub or a bank statement, get it to them quickly.
How to Reduce Your Rates & Fees: The following scenarios will always yield the best possible combination of rate and fees.
Middle FICO score: 740 or higher -- Lenders consider this the ideal credit score range
LTV (Loan-To-Value): 70 percent or lower -- Equity and/or down payment at 30 percent yields substantially reduced pricing adjustments to rate and fees
Occupancy: Primary residence -- Owner-occupied and second home transactions are the lowest cost mortgage types available. A second home is also classified as a vacation home.
Loan amount: Up to$417,000 -- Using the traditional conforming loan limit at $417,000 in most geographic areas
Lock Period: 30 Days -- Closing escrow within a month. Proactively providing to the lender any documents they may need during the process quickly will keep your rate and fees low.
A 15-day rate lock does have a lower price than a 30-day rate lock because of the time value of money. The longer the holding on that coupon, the more opportunity the market has to change, creating interest rate risk to the lender. By sharing some of that risk with the lender, a savvy consumer may be able to grind out a lower-priced loan.
Ideally, the two biggest factors to pay attention to in reducing your mortgage rates and fees is cash and credit. First, with managing your credit, a qualified mortgage professional with experience should be able to help you manage your liabilities in order to reduce your mortgage costs. Perhaps, it might mean paying off in full or paying down credit cards or even opening up new credit. Also, it helps to get familiar with your credit far in advance of applying for a mortgage - six months or even longer - to give you enough time to address any potential problems. Start by checking your credit reports for any issues, as well as your credit scores. You can check your credit reports for free once a year, and you can check two of your credit scores for free on Credit.com every month.
Secondly, cash is still king. If you have an interest rate and loan program that is not necessarily ideal, getting a larger down payment together so you have an appropriate loan-to-value can easily shave off thousands of dollars in unnecessary interest over the life of your loan.
Finally, a smart consumer should seek to work with an experienced mortgage professional who can proactively help them manage their credit and finances while ultimately reducing mortgage costs.