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Why didn't I get the same rate?

How do we determine what rate you will get offered?

(aka, Why didn’t I get the same rate you gave my friend/neighbor?)

 

There are four major things  that come into play when we determine what interest rate we can offer you:

  1. Closing costs – the amount of money it costs to close your loan
  2. Interest Rates – and pricing in the current market
  3. Time – including capacity within the industry/investor/Lender
  4. Specific Loan Factors – LTV, DTI, Purpose, Type, etc

 

  1. Closing costs

For a loan,  costs are pretty much the same except for the title insurance and intangibles taxes.

  1. Basic costs of processing and underwriting the loan.
  2. Third party costs for checking credit, flood zone, employment, and fraud guard.
  3. Attorney costs for closing the loan, searching the title history and recording the loan at the courthouse and paying off your old loan, then dispersing funds.

The first three items are fairly constant at $2500 total.

 Then you add a percentage for Title insurance and Intangibles taxes in GA. These are 0.25% and 0.30% for a total of .55%. This ends up coming out to another $1650 on a 300K loan amount or $3650 total (2500+1650). You can compute your own expected cost this way.

 

2. Interest Rates

  1. there are many rates and costs/rebates available each day. A typical rate table may show for a 20YR loan and a $350,000 loan amount. The following is a simplified example of a rate table with price/rebate shown:

Rate

Net Price

Credit/Fee

4.625

103.539

$12,315.72

4.500

103.459

$12,037.32

4.375

103.463

$12,051.24

4.250

103.279

$11,410.92

4.125

103.133

$10,902.84

4.000

102.985

$10,387.80

3.875

102.908

$10,119.84

3.750

102.509

$8,731.32

3.625

102.317

$8,063.16

3.500

102.040

$7,099.20

3.375

101.643

$5,717.64

3.250

101.198

$4,169.04

3.125

101.413

$4,917.24

3.000

100.981

$3,413.88

2.875

100.446

$1,552.08

2.750

99.720

($974.40)

 

The Net Price is the amount of money you pay(in red) or you get(in black) for that rate.

Now consider pricing two loans, one for 350K and the other for 200K........

 

Example 1: Pick a rate for a 350K free refi

 

So, computing the rate for a FREE refi on a 350K loan we would calculate costs to be $2500 + .55% of 350k or $1950 for a  total of $4450.

Therefore, we need a rate that pays $4450 in rebate (green) back to us to pay the costs. That would mean we need to use the 3.375% rate to get $5717 back and use 4500 of it to pay the closing costs.

So a $350k loan gets 3.375% on a 20 YR free refi and we get $1267 in profit.

 

Example 2: Pick a rate for a 200K free refi

 

Costs are $2500 plus .55% of 200K ($1100) for a total of $3600 in total costs.

Rates for a 200K loan are:

Rate

Net Price

Credit/Fee

4.625

103.563

$7,126.00

4.500

103.485

$6,970.00

4.375

103.494

$6,988.00

4.250

103.308

$6,616.00

4.125

103.097

$6,194.00

4.000

102.951

$5,902.00

3.875

102.863

$5,726.00

3.750

102.462

$4,924.00

3.625

102.295

$4,590.00

3.500

102.007

$4,014.00

3.375

101.609

$3,218.00

3.250

101.160

$2,320.00

3.125

101.398

$2,796.00

3.000

100.965

$1,930.00

2.875

100.431

$862.00

2.750

99.701

($598.00)

 

Now look at the table. We need to use at least 3.50% to get $4014 but that only leaves $414 left for profit. That’s not going to work, so now we must pick the next higher rate , 3.625% to get $4590 and get about $990 profit.

 

So, the 200K loan is going to get 3.625% on this same day using the same rates, while the 350K loan gets 3.375%.

 

 

3. Time / Capacity

 

Time factors into the rate pricing in that a true interest rate table has a column of prices for each lock period.

SO, in the table above we were showing pricing for 30 day rates locks. There are also 45 day and 60 day and even longer rate locks, all with their own pricing columns.


Capacity also factors into determining how much time you need on a rate lock.  This can be influenced by the current economic cycle and the Fed as well as the seasonality of the business of home purchases which tend to occur more in the spring and summer months.

The more people buying homes and refinancing, the longer the wait times. Lenders have a fixed capacity for underwriting and closing loans. When the staff reaches their capacity, then new loans have to wait their turn for underwriting.  Imagine an amusement park with lines for the roller coaster, when its crowded the lines are longer than when it’s not crowded. One of my clients asked me, “what about a fast pass?”, which I thought was insightful. And in a way, a fast pass does exist, but its only available for purchase transactions, not refinances. Therefore, if you come in on the tail end of a refinance boom, you may not get the same rates because a longer rate lock is required to meet current turn times.

 

4. Specific Loan Factors

 

Pricing loans as we’ve shown above has been greatly simplified. Different scenarios will have different pricing factors which will affect the interest rate. All of the factors belong can have their own pricing adjustments which will impact the interest rate that you get quoted. The most common factors are:

  1. Purpose – purchase, refinance, or cash out refinance
  2. Occupancy – Primary, Second home, Investment?
  3. Credit  score – scores are prices in 20 point brackets from 580-760, so 580-599, 600-619,etc
  4. LTV – the ration of the Loan amount compared To the Value of the property
  5. DTI – the Debt To Income ratio of the borrower ,under 45% over 45%, over 50%
  6. Loan Size – larger loans have bonus points
  7. Products – 10,15,20,25,30 years all have minor adjustments
  8. Escrow account – will it have one or not?

 

So, when searching for an interest rate, be sure to mention any special factors that may impact your pricing so that the rate you get quoted up front, is still the rate that you get offered once all of your information is sent in for underwriting.  Many of these things are out of our control and we may even disagree with how they are applied by the major loan providers like FNMA and FRDMAC. But it’s better to be upfront about these things so that you get a realistic assessment of your situation and you get a realistic interest rate and avoid disappointments later in the process.