Interest Rates FAQ
Many times, borrowers become confused when they are given a rate of 4.25%, for instance, when their friend recently closed with a rate of 3.875%. If current rates are the same across the board, how does this happen? Before explaining the disparity in numbers, it’s important to understand that there is no such thing as an absolute rate. Mortgages are all about pricing. Put simply, the bank will negotiate the best deal on their behalf. If you are given a higher interest rate, this means the bank is giving you more towards the closing costs of the loan.
Here’s an extended example. The current mortgage rate is 4.0%. You’re buying a $500,000 home, borrow $400,000 (80% of its value), have a credit score of 740 (the best), and the mortgage broker is charging 2.75% of the loan amount for his commission ($11,000). The bank says that for a rate of 4.125% they will give you 102.75% of the loan amount, therefore covering your broker fee. Alternatively, you could also buy out your rate to be 3.75, but the bank will only give you 99.5% of the loan amount, which requires you to pay out of pocket 3.25% ($13,000).
In conclusion, when rates are so-called “good,” there will be options as in the above scenario. But even when interest rates go up, say from 4.0% to 4.375%, the very same thing will happen. There are also other factors at play in a mortgage transaction, as evidenced in the resources below.
Yes. For instance, if the aforementioned example were to apply to an investment property you seek to rent (as opposed to live in as your primary home), pricing may be slightly less favorable. For the same loan amount, the bank may decide to offer you the full 102.75% but at 4.75% instead of 4.125%. From the bank’s perspective, the fact that you’re investing is riskier than if you were buying for yourself, hence the higher rate.
Discount points or “mortgage points” are fees paid to the lender upon closing in exchange for a reduced interest rate. This is the industry’s way of referring to the tradeoff mentioned in the above example.
Overall, what are the pros and cons associated with a loan transaction?
In order to secure the most desirable interest rate, buyers need a combination of the following “ideal” factors:
- You will be the primary resident of the home being purchased
- You are seeking a smaller loan amount relative to the home’s value
- You have a strong credit score (740 is the best in mortgage transactions)
- You are purchasing versus refinancing
While Funding Source can still work with you to find an affordable loan option, the following factors are considered “negative” from the bank’s standpoint:
- The property being purchased is for investment purposes
- You are seeking a higher loan amount relative to the home’s value
- You have a weak credit score
- The property being purchased is a condominium or contains 2+ units
- The transaction is a cash-out refinance
To answer the original question, there are many factors at play, which resulted in your friend getting a better interest rate. Perhaps he or she purchased the home as a primary residence, had a better credit score, put more money down, decided to pay more upfront to secure lower monthly payments, etc. Any combination of these factors likely contributed to this result.
Credit Report FAQ
A credit report is a document that contains all information submitted by creditors about your financial accounts, borrowing history, as well as reported employment information, date of birth, known addresses and other stats compiled throughout your lifetime.
This information is reported to the 3 major financial credit bureaus: Equifax, TransUnion and Experian. Every time you open a credit card, car loan, mortgage, student loan or any type of “credit,” the financial institution or “creditor” will report this information to the 3 credit bureaus. Over the life of your credit, they will report all payment and other activity on the account.
These 3 bureaus each have a unique way of calculating scores based on factors like timely payments, credit limit, how many accounts you have open, and the number of inquiries you’ve recently had. The way they calculate that scoring is not known to anyone, but it’s not difficult to guess. That’s why you see a similar score on free sites like Credit Karma, CreditWise, etc. These sites will provide you with a close guess of your credit score, but they are not 100% accurate.
If you suspect there are problems with your credit report, it’s important that you follow up as soon as possible. When applying for a mortgage loan, errors may increase your eligible rates or exclude you from a loan altogether (depending on the severity of error). Once you’ve identified and corrected the issue, Funding Source will have an even better chance at securing you an attractive rate.
You can request a free copy of your credit score by calling or visiting the website of one of the three main credit reporting companies: Experian, Equifax or TransUnion. Each entity will furnish a free report once per year.
In our experience, banks usually determine their rates based on the median score of the three bureaus.
Although Funding Source has plenty of funding solutions, we consider a score of 740 to be the best. In some unique cases, it’s beneficial to have a score of over 800, but with a traditional mortgage, 740 is considered most desirable.
Funding Source can help you find viable options, even if your score is not at 740. For a traditional mortgage, you need a score of at least 620. For someone lower than 620, there are a few other options, including FHA mortgages, which are offered to individuals with scores as low as 500 in some cases. Still, you want to keep in mind that the lower score you have, the more the loan will cost you on a monthly basis.
The easiest and least expensive thing you can do to improve your score is to pay off all your credit cards to lower than 10% available credit. If your low score is due to late payments or delinquent accounts, you will have to wait. By making regular payments over time, your credit score will slowly but surely improve.
In addition to your credit score, Funding Source will look at your debt as a whole, as well as taking other complex factors into consideration. Good payment history, very little debt and regular employment are all reasons for lenders to forgive a low score and agree to loan approval.
Escrow Accounts FAQ
In terms of a mortgage transaction, the definition of an escrow account is that some money is being held in the possession of a 3rd party (for some reason).
Escrow accounts come into play when you take out certain mortgage types that the bank consider to be risky. Instead of you paying the property tax and insurance payments yourself, the bank wants you to make monthly payments to them. Then, when the bills are due, the bank will have sufficient funds to pay them on your behalf.
In most transactions, it’s up to the borrower if they want to set up an escrow account, and the option is totally your preference. It can be more convenient to pay a portion of your tax bill each month instead of being hit with a lump sum at the end of the year.
In general, there are a couple of key perks that buyers enjoy when putting money in escrow:
- You make smaller monthly payments instead of paying one large annual bill
- You only need to worry about making one payment to the bank instead of paying out multiple entities
Although these benefits may seem attractive, you want to consider the following downsides to having an escrow account:
- You will have a bigger payment owed to the bank each month
- Setting up an escrow account results in more closing costs because the bank needs to have funds available to pay your next tax bill (plus a little more in case your bill increases)
- In some cases, the bank may miscalculate your monthly dues, resulting in a much higher payment than expected
To start, a pre-approval is not an official approval from the bank. It’s when a prospective loan officer reviews all of your income and other financial information. Then, using his or her extensive knowledge, the officer issues a letter that lets you know whether or not the firm thinks you will be approved for “X” amount of funds.
A good loan officer will require you to present all relevant information in addition to checking your credit score before issuing the pre-approval letter. Because a loan officer wants to be true to his word, he will only grant pre-approval if he has utmost confidence that the bank will agree with the determination.
When shopping for a home, a real estate agent will first want to see a pre-approval letter before showing you houses. So, the first step in the entire process will be to secure your pre-approval letter.
If you presented all information correctly to your loan officer, you will most likely be approved later on. However, if there are any surprises that your loan officer was not informed about, then this may be a game changer.
Pre-approval is not so much about your credit score. It’s about properly determining all of your monthly obligations including payments listed on the report.
If the seller demands an official bank approval, Funding Source may have other options. If there’s time, we can send your loan application to a bank (even without a property address) and get a TBD approval. This process typically takes about 7-10 days.
Registered Mortgage Broker – NYS Department of Financial Services. NMLS ID# 16660. All loans arranged through third party lenders. Licensed Mortgage Broker NJ and FL Banking Departments