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A Basic Lesson on Why Mortgage Rates Are What They are

When a client asks one of JMAC’s brokers about rates, most likely they do not understand how different variables affect the rates they can expect to get on their purchase or refinance. Chris Carter from Florida put together a concise explanation that aids buyers in understanding a true picture of an attainable rate, versus the offered rate assumption which is the optimum combination of factors such as high credit score, low DTI, 20% down, single-family, detached, and primary residence. This has also been referred to as a vanilla loan which are a fairly rare occurrence.

The rate sheets Realtors® receive from many mortgage lenders show best-case, best available market rates. They are sometimes referred to as "teaser" rates because they're intended to get the attention of potential borrowers. The interest rate a buyer receives starts with a market rate, then is adjusted to reflect individual borrower qualifying specifics (like credit score and DTI) and the combination of factors that we’ll discuss.

Until buyers are aware of the combination of factors that apply to an obtainable rate, they are often confused and even insulted when the featured rate they see on a TV commercial, internet ad, or lender's rate sheet isn't available to them. Here are some of the main factors that lenders consider in addition to the buyer's income, assets, and credit:

·         “Program” variables such as Fixed or adjustable interest rate, Government-insured or conventional, Purchase or refinance, Loan amount (conforming, high-balance, or Jumbo), Loan-To-Value ratio and Term in years, Lock period in days, Mortgage Insurance or LDP/NMI above 80% LTV and Escrow waiver.

·         “Property” variables like Single family or multi-unit, Attached (villa, duplex, townhouse), Condo (low rise, high rise), Planned Unit Development with HOA, Co-op (residents own shares, not property), Geographic location, and Constructed on site, modular, or manufactured.

·         There are also “use” variables that refer to Primary residence, owner occupied, Second / vacation home, not rented to others, Investment property, short-term or annual rental offered or Mixed use (residential, commercial, office, agricultural).

The safest and easiest way to handle buyers' rate questions is to have them call a reputable Loan Originator directly to accurately answer their questions, taking into account their personal finances as well as the specifics of any purchase they're considering. It's important for buyers to be aware of these variables as they may be assuming they'll get a rate they saw on some ad or rate sheet—but didn't have time to read the fine print. Well-informed buyers help make the trip to the closing table so much smoother for everyone.