Mortgage rates are low but there are costs associated with acquiring a loan. Those borrowers with less than perfect credit have incurred increased fees recently implemented by Freddie Mac and Fannie Mae. Many of us in the mortgage industry think that with the uncertainty in the mortgage market, other costs will increase as lenders look to reduce their costs and anticipate rates.
Lending standards are really tight which means that borrowers who qualify for the really low rates must meet a strict and narrow set of guidelines.
In general, to get the headline making rates, borrowers are often paying more points, or prepaid interest, that brings the mortgage rate down.
Over the past year and a half there has been many changes in mortgage pricing, and from the borrower’s standpoint, it’s mainly negative. Fees are added based on a borrower’s credit scores according to Fannie Mae and Freddie Mac’s new risk-based pricing. Now, borrower’s must have a FICO score of 740 or higher to avoid the extra fees, according to Dan Green, author of TheMortgageReports.com and loan officer with Mobium Mortgage in Cincinnati. Lenders incorporated the new rules into the rate sheets in the middle of January even though the official effective date is April.
These new fees, Loan Level Price Adjustments, are an unpleasant surprise for some borrowers wanting to take advantage of low rates. These fees create different pricing scenarios from one person to the next. What works for one borrower may cost the next person 1% more.
For those wanting to pull equity from their home through a cash-out refinance, fees have increased as well. And the lenders have added costs to condo financing.
A point is 1% of the mortgage amount, and is charged as prepaid interest. The more in points a borrower pays, the lower the rate. If points rise a bit, it’s a sign that lenders are looking for up front money as opposed to over time, thus covering a portion of their risk.
With government intervention in the mortgage market these days, rates are unpredictable, which generally causes lenders to price conservatively.
Why pay points? A borrower needs to decide whether paying a point (or more) makes more sense for them , or if a mortgage with a higher rate with no points would be better. Factors to consider would be how long does the borrower plan to stay in the home , and how long it will take for buying points to pay off. The more time a borrower plans to remain in the home, the more paying points makes financial sense. In the past one point in fees would buy a drop of 0.25% to 0.375%. These days the percentage is greater, dropping a rate 0.625% to 0.875%.
An example: A 30 yr fixed rate of 5.625% on a $417,000 loan with no points. By buying a point ($4,170), the rate dropped to 4.875%, which saves the borrower $261 monthly in interest cost. With that savings, it takes only 16 months to pay back the buy down. From this point on, everything is a benefit. Given traditional guidelines, the breakeven point would be double that 16 months.
Borrowers are also seeing some fee increases in underwriting and processing. It takes more expertise and work to process a fully documented file than the popular no-document loans of several years ago, thus the higher charges.
Mortgage rate lock fees are also more common. The largest increases in the title & settlement category are in the real estate transfer taxes charged by counties and cities. You may be able to save money when refinancing by using the same title insurance company who closed your first loan. Many title companies have gone out of business, or one company buys out another, so surviving companies are raising prices for title and settlement fees too.
A rule of thumb is that mortgage fees generally run 3% or so of the loan amount.
As a mortgage broker, InSight Mortgage Group has an advantage over the standard lender. We work with many different banks and lenders allowing us to shop around for you to find you the right product and best rate for your home financing. With so many banks and lenders discontinuing loan programs, constantly changing the guidelines or going out of business overnight, it’s good to have other options at our fingertips if the need arises. This keeps you from completely starting over.
Call us at 913-642-3344 for professional, integrity minded help in finding the right loan program for your specific needs. Or, email me at firstname.lastname@example.org with your question or concern. My staff and I are ready to work for you. Have a blessed day.