Costs to secure your financing are a big factor when it comes time to getting a mortgage. Knowing why your loan costs (X) dollars is critical in being able to better understand how lenders price loans in the marketplace. This is what you need to know…
All loans have fees. All fees are paid for by someone. You can have the perfect loan, completely clean, and there will still be fees. The old saying that there is no such thing as a free lunch remains. That being said, there are two situations where you might not pay all closing costs. The first way is for a seller to credit the closings costs when you purchase your home. The second is to select an interest rate that generates an overage/credit which is applied towards your loan fees. For the purpose of this discussion we are going to be focusing on factors that determine your interest rate and any points associated with that rate.
Two factors that determine your loan fees above anything else is your loan-to-value (LTV) and your credit score. Your loan-to-value (LTV) is the difference between the loan amount you are looking for and the value of your home. Your credit score is particularly important to how your loan is priced because it determines the risk associated with your loan. The following things play out in terms of how your loan is priced:
- Higher Loan-to-Value (LTV) loans – loan adjustments start happening at 65% LTV in increments of 5% all the way up to 95% LTV on Conventional loans. For example, if you’re looking for a Conventional mortgage and you have 20% equity in the home (80% LTV), your loan will be priced worse than someone who has 30% equity/70% LTV.
- Credit – your credit score is the barometer for the lender to use as a gauge of future risk potential for payment default. The higher your credit score, the less likely you are to default, and the less risk the lender assumes by granting you that mortgage. Credit scores breakdown like this:
- 740+ excellent,
- 720-739 great,
- 700-719 good,
- 680-699 fair,
- 620-679 poor.
- Occupancy – if the property you are looking to purchase is a second home or a rental property, you might end up paying an additional pricing adjustment in the origination of your mortgage loan. Rental properties are especially known for this pricing adjustment. This change can influence an interest rate by as much as .375 when compared to a primary home loan.
- Property Type – if your property is a condominium and/or a multifamily property, you can generally expect to pay more. Specifically, this is because both types of properties contain more risk to both Fannie Mae and Freddie Mac than a single family home. Condominiums have rules and regulations/limitations that single-family homes do not. A multi-family property, such as the duplex, is more risky because there is another unit involved and more potential liability when compared to a single-family home.
If you are looking for a mortgage with a high loan-to-value and a great credit score such as a 95% financing…
Then you can expect to be paying interest rate .375-.5 more than what you might see advertised online or in print media.
If you are financing a triplex as either an owner or a non-owner-occupied transaction…
Then, if the property is a primary home, you can expect to pay about .5% in the form of a discount point based on the rate chosen. If you will be renting your property out for investment purposes, you can expect to pay as much as .5% more in rate with up to one discount point based on the rate chosen.
The moral of the story is that not all mortgage rates and pricing are equal to one another. If you are pricing out a loan with a lender and your scenario falls into any one or more of the intricacies outlined in this post, you can expect to be paying more for the type of financing in which you are seeking based on these characteristics.
Looking to finance a unique home? Begin by getting free quote online now.