- - Thursday, November 10, 2011

While mortgage rates continue to bounce around the basement floor, the media, along with irresponsible lender advertising, continue to report record low rates while omitting crucial information necessary for a would-be borrower to make an informed decision.

I receive, sometimes more than once a day, a call from a homeowner that invariably begins like this: “Mr. Savage, I am interested in refinancing and hear that rates are now down to 3 percent.”

In most cases, these folks are expecting me to quote this rate for a 30-year fixed-rate loan. Unfortunately, I have to explain that what they hear or read is distorted or missing some facts. Let’s examine the myriad reasons the potential borrower is either ineligible or not interested in a mortgage loan that carries a rate of 3 percent.

First, the loan is not amortized over 30 years with a fixed rate. The lowest 30-year fixed rate I could find while researching for this column was a note rate of 3.50 percent. The problem is, it required the borrower to pay 4 points plus closing costs. That would result in nonrefundable fees of about $15,000 for a $300,000 loan.

What mortgage program can accurately boast an interest rate of 3 percent? I see that 3 percent is available for a fixed-rate loan that’s amortized over 10 years. The borrower would have to pay 1 point, plus closing costs. That would total about $6,000 on a $300,000 loan — still pretty expensive. And the required payment would be quite high.

I see that 3 percent is indeed available on a 5/1 adjustable-rate mortgage, which carries a fixed rate for the first five years and adjusts annually for the remaining 25 years. In fact, under certain conditions, a borrower actually could get this rate and pay zero fees. I’m not sure this would make sense for a homeowner who is planning to stay in the property for a long time, but it might be ideal for a transient family that plans on selling before the five-year fixed period expires.

Now let’s examine a few of the requirements a borrower must meet to be eligible for the best possible terms:

  • Credit score. If your credit score isn’t 740 or higher, it’s likely you won’t receive the best terms. The lower the score, the higher the rate and fees.
  • Loan-to-value. The best possible terms require you to have 40 percent equity in your home unless your credit score is at least 700. The majority of American homeowners don’t have that much equity, especially because property values have declined nationwide.
  • Income documentation. If you cannot document the required income level through tax returns, W-2s and pay stubs, you are not likely to be eligible for any loan, even if you have a ton of money in the bank and perfect credit.
  • Loan size. All applications require a ton of work and documentation in order to reach the coveted “clear-to-close” status, regardless of the size of the loan. As in any other financial transaction, such as for real estate or stocks, the compensation is based upon the dollar amount of the deal. So a borrower with a $60,000 loan will pay a higher rate or higher fees as a percentage of the loan amount than a borrower with a $400,000 loan.

So next time you hear on the news that rates have dropped to a particular level, understand that there probably are hefty fees and lots of strings attached. It is not as it seems.

Send email to henrysavage@pmcmortgage.com.

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