- The Washington Times - Thursday, October 14, 2010

It was all over the media last week: Mortgage rates hit record lows. This time, it might be true. In 22 years in this business, I have never seen my beloved “zero-cost” refi program with rates as low as 4.375 percent for a 30-year fixed rate and 3.875 percent for a 15-year fixed rate.

Before all my customers who have rates locked and a refi in process read this and call me screaming, wanting to know why their locked rate isn’t that low, let me explain.

Last week, mortgage giant Fannie Mae reported mortgage rates at record lows, with the average rate reported by its lenders to be 4.27 percent with an average of .80 points. Looking at my rate sheet, I was delighted to see I was able to quote 4.25 percent with zero points and 4.375 percent with zero closing costs for a 30-year fixed rate.

How could my rates be so much better than the national average? The answer is they can’t. Ever since the mortgage meltdown, the industry has implemented so-called “risk-based pricing.” In a nutshell, it means folks with a reasonably good credit report and a small amount of equity who are looking for a mortgage will be offered a significantly higher rate than a borrower who has stellar credit and a huge down payment.

Here are a couple of examples:

• A homeowner has a $400,000 loan secured against a home worth more than $700,000. His credit scores are a near-perfect 800 and he has plenty of verifiable assets and income. This guy is golden. He’ll qualify for the 4.25 percent rate with no points or the 4.375 percent rate with no closing costs.

• Another homeowner has a $180,000 loan secured against a property worth $225,000. Although his income and assets are satisfactory, his credit score is 640 thanks to a few late payments on a credit card several months ago. Because this fellow has just 20 percent equity and much lower credit scores, the best rate he can hope for is about 5.25 percent with no points.

Depending on the details of your situation, your quoted rate likely will fall somewhere in between.

Everything is standardized these days. Interest rates are indeed at rock bottom, but far fewer folks qualify for the absolute lowest rate available. Still, rates are so low that even those folks who have less than perfect credit and minimal equity or down payment should look into buying or refinancing. If the underwriting standards would reach a reasonable balance, the economy might improve.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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