- - Thursday, July 26, 2012

Q. I’m shopping around for a mortgage to refinance my house, and every time I speak with a lender, he asks me all sorts of personal questions, such as my credit rating, income and home value.

I simply am trying to compare the rates and fees between lenders. I don’t understand why so much information is required to get a simple quote. It seems every lender is trying to suck me into something. Why won’t lenders just give out their rates and fees?

A. The interest rate and fees are largely standardized and depend upon some very specific information. The lenders simply are trying to give you a reliable quote.

The mortgage-industry reforms made after the 2008 meltdown require that a lender request a lot of information to give an accurate quote. I have in my hand one of my wholesale rate sheets. The 30-year fixed-rate box offers note rates ranging from 3.375 percent to 5 percent. Each interest rate gives the borrower a credit toward closing costs or charges the borrower discount points, depending upon the note rate.

Let’s say you have a $200,000 loan to be refinanced.

For a fixed rate of 3.375 percent, the lender will charge a “base price” of 1.50 points, plus customary closing costs. One point is equal to 1 percent of the loan amount in fees. If you wanted a rate of 3.375 percent, you would be required to pay closing costs plus $3,000 in points.

For a fixed rate of 5 percent, the lender will give you a credit of 4.75 percent, or $9,500. This certainly will cover all your fees. Lenders do not allow a closing-cost credit to exceed the actual closing costs and escrow deposits on the refinance, so a 5 percent rate would be impractical.

Your loan officer might estimate your closing costs and prepaid items at $5,000. I see from my rate sheet that the lender will give a credit of 2.375 percent, or $4,750. That would cover all of the transactional costs and most of the escrow deposits.

But wait. This quote is accurate only if the borrower’s situation meets very specific criteria. In fact, this quote would be accurate only if the property is a primary residence in Virginia, the borrower’s credit score is above 720 (but not higher than 740), the borrower does not take cash out, the property appraises between $285,714 and $333,333, and there is no secondary financing that would make the home’s combined loan-to-value (CLTV) exceed 75 percent but not be more than 95 percent — unless the property appraises for at least $307,692, so the loan-to-value (LTV) doesn’t exceed 65 percent.

I honestly did not try to make that sound complicated. But it’s all true. Here are a handful of things that would affect this rate quote:

  • Improve the price (closing-cost credit) by .50 percent if the credit score exceeds 740 and the LTV is 60 percent or less.
  • Improve the price by .375 if the loan amount exceeds $225,000 but is less than $300,000.
  • Improve the price by .75 if the loan amount exceeds $300,000 but is less than $417,000.
  • Improve the price by .25 if the loan amount exceeds $417,000 and if the property is in a designated high-cost area. But if the home isn’t in a designated high-cost area, there is no improvement.
  • Worsen the price incrementally as the LTV increases and the credit score drops. If, for example, you have a 95 percent LTV and a credit score below 620, the price would be worsened by 4.25 percent.

I think you get the idea. Gone are the days when you could go to a bank or broker and get a simple rate quote. As I frequently say, the mortgage business is an overly complicated, overthought, tangled ball of fishing line — but rates are great for a purchase or refi.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to [email protected]

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