How do I get the lowest interest possible? This is one of the first questions a buyer asks when starting their search for a new home. We decided to bring in an expert to give you the real deal on what determines the interest rate you get. Scott Groves with Movement Mortgage is a local lender who does a lot of business in this neighborhood. Take it away, Scott!
"So, did you wake up today excited to read about Greece's debt restructuring plan? Did you immediately got to CNBC to check the current price of the German "Bund" (their version of our treasury bonds)? Were you waiting by your computer at 6:30 a.m. for the stock market's opening bell to see how the redemption rate and cash-flow of money in-and-out of stocks and bonds was going to affect mortgage interest rates?
Guess what, neither did I!
However, these are just a few of the many things that affect rates on an hourly basis.
I pay a LOT of money every year to subscribe to several bond tracking services who make educated guesses about where interest rates are headed. With about 70% accuracy, we get some advance notice about when to "float" rates and when to recommend to our clients about "locking" rates.
However, the best financial minds in the world are only correct on market movements about 70% - 80% of the time. If ANYONE, especially a financial professional or a mortgage lender, is telling you that he always know what rates are going to do - he is LYING. If I knew exactly when rates were going to rise and fall, I would be filthy rich trading bond-futures on my own private island.
So, instead of being an extreme rate shopper and focusing on the daily movement of rates - which we cannot predict - let's look at known variables that affect interest rates:
Being Self-Employed - First of all, one point of clarification. Being self-employed, in-and-of itself, does NOT necessarily mean a higher interest rate. However, self-employed borrowers (or those in the entertainment industry with multiple sources of income) tend to want to buy a home right after they have had a very strong financial year. Most lenders call for a two year average of income to be used for qualifying self-employed borrowers.
Therefore, if our client made $50K in 2013 but increased to $150K in 2014 and now wants to buy a house, most lenders call for a two-year average to be used. This would give our client a "net" qualifying income of $100K. However, for a small bump to the rate, our team can use the most recent year of tax returns to qualify. By qualifying off of one year of tax returns - this same client can use the $150K of qualifying income from 2014 and increase his purchasing power by $200K. Of course, with this added underwriting risk, this program comes at a rate increase of approximately 0.25%.
Credit score - Although the mortgage approval process has moved to more of a pass/fail type system since 2008, credit scores still matter. A FICO score of 720 will allow many clients to do a 10% down loan AND completely avoiding mortgage insurance. A 740 FICO score will insure the best rate - usually a savings of 0.125% over lower scoring clients. A FICO score under 700 will generally result in a pricing add-on of roughly 0.25% to the rate. One of the many advantages of getting approved EARLY with Movement Mortgage and The Scott Groves Team is that we have a tool to help borrower increase their credit score by strategically paying off targeted amounts of debt.
Property Type - Buying anything other than an owner-occupied single family residence will also include a small bump to the rate. Condos - add 0.25%. Duplex, triplex or fourplex- add 0.25%. Investment property - add 0.25% in addition to any of the other add-ons previously mentioned. Therefore, based on today's rate, a client with a FICO score under 700, buying an investment condo, would expect to pay roughly 5.00% on the interest rate. This 5% rate, on an investment property, is still historically very good. However, it's a far cry from the 3.875% rates we are preconditioned to expect thanks to endless radio and internet ads.
Loan To Value - The more you finance, the higher the rate. Have you ever listened to the REALLY fast talking guy at the end of a mortgage advertisement on the radio. One thing that always get's mentioned is "60% LTV". LTV stands for loan-to-value. Therefore, all the radio ads (and TV / internet ads) we are exposed to are "pricing" the loan with a 40% down payment and a 60% loan-to-value. My clients rarely have 40% down and are therefore subject to rates about 0.125% above these advertised rates.
As outlined, there are a lot of variables that affect the rate. Some of these variables are known, some are unknown. Feel free to give me a call anytime you want to talk about rates."
You can visit Scott's website here to learn more about his team and how they do business.