Why Do Some Mortgage Companies Have Better Rates Than Others
Basically it comes down to how much profit a mortgage company is making. Mortgage rates are essentially based on the US bond market(typically 10 year bond). Mortgage companies mark up these rates depending on their profit margin needs. This is why most smaller local companies or brokers tend to be more competitively priced. Smaller companies have lower overhead and don’t require as much profit per loan compared to bigger companies who have higher expenses.
As an exclusive Colorado mortgage broker, we are able to offer some of the most competitive mortgage rates in the State. We have low overhead and pride ourselves in offering our clients the most competitive rates in the market. One of the reasons we’re so competitive is because we get wholesale rates from various mortgage companies and we’re able to shop and pass those savings to our clients.
The rates above don’t have any points or buy downs but in theory a borrower can pay an additional fee to get a lower rate. Buying down rates can be costly so this will depend on how long someone is planning on staying in their home. In many cases, paying extra fees/points doesn’t make sense because the homeowner will not stay in their home long enough to recoup the costs. For example, on a $300,000 loan someone may pay $2,000 to reduce their rate by .125%(1/8). The lower rate results in a monthly savings of $22. In theory, if the homeowner just makes their minimum payment, it would take 90 months to recoup the $2,000 buy down.
Other typical lender fees on a mortgage transaction are origination, underwriting and processing fees. We typically do not charge origination but in some cases processing and/or underwriting fees may apply. Sometimes we may charge an origination fee if the borrower wants the lowest wholesale PAR rate.
How Are Mortgage Rates Established
Credit Scores: There are three major credit bureaus in the USA. Mortgage companies will use the middle credit score to qualify a borrower. Credit scores are probably the most important single factor to getting the best mortgage rate especially with conventional loans. Rates will depend on what bracket your middle score falls into. Credit score adjustments will apply if a score is 720+, 700-719,680-699, 660-679, all the way down to 580.
Down Payment/Equity: When someone has a larger down payment on a purchase or more equity on a refinance, it’s considered less risky resulting in more competitive rates. This pretty much only applies to conventional loans. This does not affect other programs like FHA, VA or USDA.
When getting a quote on a conventional Fannie Mae/Freddie Mac loan, credit score and down payment/equity both play a big role. Typically, one of those two factors can offset the other. Meaning someone who has a high credit score can still get a good interesting rate even though they may not have a large down payment or don’t have a lot of equity.
Typically, if someone has a lower credit score of under 680 and do not have a large down payment of 20%+, FHA tends to be the better option for them. On the other hand, conventional loans with 20% equity or 20% down, do not require mortgage insurance. Even though FHA rates tend to be lower, FHA has mandatory mortgage insurance so in some cases a borrower may be better off with a conventional loan if they have 20% equity/down payment.
Rates tend to be lower than conventional but do have mandatory upfront and monthly mortgage insurance. FHA is a lenient program that does not require a high credit score to get the best rate. Typically, a 660+ score is good enough to get the best FHA rate. Equity and/or down payment is not a factor with FHA rates so this is a great option for people who has a credit score in the mid 600’s and a small down payment or a lack of equity. Credit scores below 660 will have adjustments to the rate and become substantial once you go below 620. If someone falls in the 580-620 bracket, they can expect a higher rate than someone with a 660+.
Rates are as competitive as FHA and have almost identical credit score adjustments to the rate. Equity and/or down payment plays no roll in what rate a borrower qualifies for.
Veteran Administration loans are also very similar to FHA and USDA. Credit scores under 660 will impact rates but equity/down payment is not a factor.
Typically, shorter terms will offer lower mortgage rates. 30 year fixed loans are most common but shorter term loans, specifically 15 year loans, will usually have lower rates. The difference in rate will fluctuate depending on the current market conditions. Sometimes shorter term loans will have lower rates but other times it will not make a huge difference.
ARM loans that adjust after a certain period will also on most occasions have lower rates. ARM loans are considered riskier because the rate is only fixed for a certain amount of years(1, 3 ,5, 7 or 10 years). Once the rate becomes adjustable, it’s very likely that the rate and monthly payment will go up. This is especially common in a rising interest rate environment.
Contact Us For Details
Give us a call at 720-514-3388 to discuss your particular situation or fill out the short contact form. Part of our job is to analyze our clients situation to see what the best option is for them. We have a lot of flexibility in how we can structure a loan to fit our clients needs. We are not pushy so we promise you will not feel pressured or uncomfortable. In many cases, we can provide a mortgage quote without even pulling credit.