Rates

NOTES FROM A MORTGAGE PROFESSIONAL:

A PRIMER ABOUT THE FACTORS USED IN CALCULATING RATES

By Mathew Schulz President/Owner at Firelight Mortgage, Board of Directors at the Colorado Mortgage Lenders Association

Hey Mathew, what’s the rate on the 30-year fixed mortgage today?

I HATE this question! It’s not because I am trying to be dodgy or elusive, it is because I believe that it is next to impossible to answer accurately without more information.

In general, the public is not aware of all the different factors that go into calculating a rate. Banks don’t offer just one interest rate, but many different interest rates.

Let’s tackle the first issue: adjustments. There are so many different factors that go into calculating a buyer’s rate, and it goes a lot deeper than a credit score. However, that is a great place to start. Fannie Mae and Freddie Mac both look at a 740 middle credit score and above as the top tier of pricing. If you have a 740 or an 820, it doesn’t really matter, you are in the top tier of pricing.

Every 20 points below a 740-middle score, there is an adjustment to the pricing of the loan. That adjustment is also based on the equity position of the loan, also known as the loan to value ratio (LTV). The larger the down payment on a purchase or equity position on a refinance, combined with a higher credit score, the consumer will receive the optimal pricing. However, as the credit score and equity position decrease, the adjustments become larger. Therefore, the consumer would receive a higher interest rate.

Yet there are so many more adjustments. Most are aware that investment property and a second home will have a higher interest rate than a primary residence. Are you aware that both Fannie Mae and Freddie Mac will give a higher interest rate if a consumer is financing a condominium with a greater than 75% loan to value? If a loan has a second mortgage (also known as a home equity loan or home equity line of credit) at the time of consummating a new first mortgage, there is also an adjustment. This adjustment is based on the loan to value ratio of the new first mortgage as well as the combined loan to value adding the first and second mortgage balances together.

In the mortgage world, there are three ways to break down loans: purchase loans, no cash out refinancesand cash-out refinances. Fannie and Freddie both have adjustments on a cash out refinance compared to a

purchase or no cash-out refinance that is also based on credit score and loan to value. Multi-unit properties will also have adjustments to pricing. And there are many more adjustments in addition to these.

Below is an example of what is called a “rate stack,” and under it is an example of a credit score adjustment table.

The numbers in the credit score table represent adjustments

to the “pricing” of the loan, not to the actual rate. An example might be an individual with a 740 middle credit score that is in the 70.01-75.00% loan-to-value column. They would have a .25% adjustment to the pricing of the mortgage. In the rate stack, if you looked at a 6.75% rate in the 30-day rate lock column, the starting price would be 100.45, meaning if the consumer chose this rate option the bank would give them .45% of their loan amount as a credit toward their closing costs. However, after having a .25% adjustment for credit score, the loan would net a 100.20 price or .20% credit toward their closing costs. In the same example, if the consumer had a 620 middle credit score, now their adjustment would be 3.0% to pricing. In theory, they could still have the same 6.75% rate if they wanted, but it would simply come with a net price of 100.45 – 3.00 = 97.45 or a 2.55% discount fee. More than likely, this consumer would go with a higher rate to absorb that pricing adjustment without having to pay dramatic discount points. You can imagine that the pricing adjustments can get significant with lower credit score borrowers, putting less money down on a property type that also has pricing adjustments.

While it is important to have a general understanding of how loans are priced, please do not get hung up on memorizing adjustment tables and all that goes into the pricing of a loan—it changes quite often. Individual banks may have other adjustments or credits that other banks do not have in addition to the standard adjustments put forth by Fannie Mae, Freddie Mac, FHA, VA, and USDA. In mentioning FHA, VA, and USDA (government loans), it is important to note that these loans start with lower interest rates in general compared to conventional loans (Fannie Mae and Freddie Mac), although they will typically come with higher fees. Individual banks also may have “portfolio” loan programs with their own pricing standards where they plan to permanently service themselves. Finally, please remember that unless you’re also licensed as a mortgage loan originator, discussing the terms and pricing of a mortgage would violate licensing standards. Best to leave it to us mortgage nerds with the giant calculators and pocket protectors!

Rate Stack Example Rate 15-Day 30-Day 45-Day 5.875 97.344 97.314 97.144 5.920 97.518 97.488 97.318 5.990 97.729 97.699 97.529 6.125 98.234 98.204 98.034 6.250 98.769 98.739 98.569 6.375 99.234 99.204 99.034 6.500 99.663 99.633 99.463 6.625 99.979 99.949 99.779 6.750 100.480 100.450 100.280 6.875 100.953 100.923 100.753 6.990 101.316 101.286 101.116 7.125 101.587 101.557 101.387 7.250 102.062 102.032 101.862 7.375 102.456 102. 426 102.256 7.500 102.731 102.701 102.531 7.625 102.877 102.847 102.677

Credit Score Table Example (DU & LP LTV/FICO; Terms > 15 Years, Including ARMs)

LTV <=60.00% 60.0170.00% 70.0175.00% 75.0180.00% 80.0185.00% 85.0190.00% 90.0195.00% 95.0197.00%

FICO>=740 0.000 0.250 0.250 0.500 0.250 0.250 0.250 0.750

720-739 0.000 0.250 0.500 0.750 0.500 0.500 0.500 1.000

700-719 0.000 0.500 1.000 1.250 1.000 1.000 1.000 1.500

680-699 0.000 0.500 1.250 1.750 1.500 1.250 1.250 1.500

660-679 0.000 1.000 2.250 2.750 2.750 2.250 2.250 2.250

640-659 0.500 1.250 2.750 3.000 3.250 2.750 2.750 2.750

620-639 0.500 1.500 3.000 3.000 3.250 3.250 3.250 3.500

< 620 (DU Only) 0.500 1.500 3.000 3.000 3.250 3.250 3.250 3.750 Mathew Schulz, CML, is the President of Firelight Mortgage Consultants in Greenwood Village, Colo., a mortgage company that he has owned for 15 years. He is also a board member and past president of the Colorado Mortgage Lenders Association. You can reach him at mschulz@FirelightMortgage.com. Matthew provides a regular look into the market called MMG Weekly. Click here if you’d like to subscribe.