Mortgage Rates And Tiered Pricing: Why Some Loans Cost More Than Others

Mortgage rates are easy to quote: Just state an interest rate and origination fee and place an asterisk that says, "*Mortgage rates and origination fees subject to change." But how and why are mortgage rates and fees subject to change even after you complete your loan application? There are many factors that go into the pricing for mortgage rates. The following factors impact your mortgage rate and origination fees.

Type of Transaction

Are you applying for a refinance mortgage or purchase mortgage? If a refinance mortgage, are you taking out any equity, i.e., a "cash-out" transaction? Are you paying off a second mortgage or home equity loan? If so, was it part of the original purchase transaction? Or is your loan application for a "rate and term" refinance with no cash-out?

The base mortgage rate and price, or origination fee, is for a purchase transaction or a rate and term refinance mortgage. If your loan application is for a cash-out refinance, or you are paying off a non-purchase second mortgage, you may have a higher origination fee or mortgage rate.

Occupancy

Who is or will be living in the property? If you are living in the property then the occupancy is owner occupied. If you will not be living in the property then the occupancy is non-owner occupied or investor owned.

Mortgage rates and origination fees are usually higher for investor or non-owner occupied loans. Note that second, or vacation homes, are generally priced the same as primary residences and considered owner occupied--generally, but, depending on the program and lender, not always.

Loan Amount

Is your mortgage application for an amount over the conforming loan limit of $417,000? Is it below $100,000? Below $75,000? If so, then your mortgage rate and origination fees may be higher.

But wy would a lender charge higher costs for lower loan amounts? Because the amount of work is the same regardless of the loan amount. A one point fee on a $70,000 loan, or $700, requires the same amount of resources and personnel to process and fund as a $225,000 mortgage application which brings in $2,250, for example.

If your loan application is for more than $417,000, or less than $150,000, check to see what, if any, changes may be made to your mortgage rate and/or origination fees.

Property Type

Is the property you are buying or refinancing a condominium? Depending on your down payment or equity, you may have adjustments to your mortgage rate or origination fees.

Is your refinance mortgage application or purchase mortgage application for a duplex or three- or four-unit property? If so, then you will most likely have adjustments increasing your mortgage rate and/or origination fees.

Credit Scores and Loan-To-Value

Fannie Mae and Freddie Mac have implemented pricing tiers for FICO scores in twenty point brackets up to a 740 credit score (i.e., 660-679 FICO has a larger pricing adjustment than 680-699, but anything above 740 is priced the same). Fannie Mae and Freddie Mac also have pricing tiers based on Loan-To-Value (LTV) increments.

The lower your credit score and the higher your LTV, the greater the pricing adjustments. For instance, if your refinance mortgage application is for a loan at 90% LTV and you have a 700 FICO score, your pricing adjustment will be less than if you have the same LTV but a 680 credit score. As might be expected, the best mortgage rate pricing is for mortgage applications with the highest credit scores and the lowest LTVs.

Purchasing Agency

Depending on your lender, you may see pricing adjustments if your loan application only qualifies for Fannie Mae or Freddie Mac, but not both.

Many lenders sell the majority of their mortgages to either Fannie or Freddie. Depending on your lender's secondary market contracts and requirements, if your mortgage application only qualifies for Freddie, for example (which might occur if you have a non-occupant co-borrower, or hi-balance, high LTV cash-out refinance), but your lender primarily sells to Fannie, your lender may charge you a pricing adjustment since Freddie loans are otherwise less profitable to them.

Take Responsibility

It is your loan application--and you are the one paying the monthly mortgage payment and origination fees.

When you receive a mortgage rate quote from your lender, inquire as to any pricing adjustments that may be in place due to your circumstances. They should be more than willing to help you evaluate whether a little more down payment, paying off a credit card bill to raise your credit score, or other choices might result in a better mortgage rate and/or origination fee.

There are many variables that go into mortgage rate pricing for your refinance mortgage or purchase mortgage application, so do not assume that the rate quoted in a local advertisement is the same mortgage rate you will be able to receive. Only your lender will be able to determine that for sure.

Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.