What affects your rate?
An inside look at wholesale rate sheets.
Every day, people call and ask, “What’s your rate?”
Decades of bank advertising have taught people to expect one rate. Banks usually advertise their lowest rate – the rate for the most qualified borrowers. But not everyone qualifies for the advertised rate. In fact, most people won’t qualify for the advertised rate!
Why do different people qualify for different rates? It has to do with how loans are priced at the wholesale level.
Wholesale rate sheets and pricing adjustments.
Once a day – or even several times a day when rates are changing rapidly – lenders get wholesale rate sheets from investors who buy mortgage loans. The rate sheets spell out the current interest rates for each loan program, along with a list of “pricing adjustments.” Pricing adjustments can be credits, which lower your rate. They can be hits, which increase your rate. Or they can be neutral, with no effect on your rate.
Each borrower’s situation carries a unique set of pricing adjustments. Your pricing adjustments will be different than your neighbor’s or your co-worker’s. You’ll each qualify for different rates – even if you were buying identical homes for the same price with the same loan program! That’s why we post a range of rates on our home page. It reflects the real world – and real borrowers – far more accurately than some pie-in-the-sky rate for the most qualified borrowers.
Note: you can also “buy down” your rate. Before we get into a discussion about pricing adjustments, we want to mention that whatever rate you qualify for, you can buy a lower rate by paying points. See our discussion about the Teeter Totter.
The all-important FICO score.
The #1 factor affecting your rate is your credit (FICO) score. A borrower with a credit score of 740 or higher gets a more favorable pricing adjustment than a borrower with a credit score of 665. Why? It’s called “risk.” The lender considers a borrower with the better FICO score to be a lower risk; therefore he or she gets a more favorable adjustment.
The pricing adjustment made on your credit score could alter your rate by as much as .125% to .5%. Over the term of a 30-year mortgage, this could add up to tens of thousands of dollars. That’s why it pays to keep a good credit score!
“Conforming loans,” (loans that follow Fannie Mae and Freddie Mac guidelines), are neutral or receive a credit, depending on the lender. The maximum loan amounts vary by county – you can see a list here. Loans above the “conforming” amount for your county are Jumbo Loans and take a hit. Loan amounts over $1 million typically come with a larger hit.
Owner-occupied properties have a neutral price adjustment. This includes the home you live in as well as one vacation home.
Loan purpose (purchase or refinance)
Property purchase is either neutral or a credit, depending on the lender. Refinancing to a lower interest rate is neutral. Refinancing to take cash out carries a hit.
Single-family, owner-occupied homes are neutral. Condos, multi-unit properties and rental or investment properties (non-owner-occupied) carry hits.
Other pricing adjustments.
The list goes on, but you get the idea. The point is that each borrower’s situation is unique and will carry a specific set of adjustments.
Low advertised rates – understanding the fine print.
When you see lenders advertise low rates, look at the fine print to see what’s required to qualify for those rates. Most lenders advertise a rate that very few borrowers will qualify for – just to get you to call. And they often add a point to bring the rate down another notch. (See more about buying down rates here.)
At Catalyst, we believe in transparency. That’s why, when we show rates on our home page, we show a range of rates. We don’t add a point to create a lower rate. We don’t use tricks to make our phone ring – we post realistic rates that many borrowers will actually qualify for. And they’re among the lowest rates you’ll find.