Without a doubt, the single question that I get asked by potential borrowers more than any other is “what’s the rate?” There are many factors that determine a borrower’s rate, and it is important to know what they are when shopping for a mortgage.
Your credit score will play a large part in determining your rate and also in deciding if you qualify for conventional financing or if you need to go down another path. It is not only your score, but also the number of open and active trade lines your report contains. Most lenders want to see at least three open and active trade lines, and they want to see at least a 24-month history for one of the trade lines. Lenders rely heavily on the fact that your past performance on how you deal with debt will be a future indicator of how you will repay the loan.
The “Loan to Value” (LTV) is another very important piece to the rate puzzle. LTV is how much you are looking to borrow in relation to the appraised value or contract price (the lower of the two). Say, for example, that you are looking to purchase a home for $100,000 and you are putting down $20,000. Your LTV would be 80%. If all other factors are the same, the larger the down payment, the better the rate will be. A person putting down 10% will normally not have as strong of a rate as someone putting down 20%, and a person putting down 30% will have a better rate than a borrower putting down 30%. Once a certain LTV is reached, additional down payment will no longer have an effect on the rate.
Property type will play a role in your rate as well. Are you purchasing a single family residence, a 2 – 4 family home, a condo, or a co-op? Will it be a primary residence, a second home or an investment property?
Loan Term is another factor that will determine the rate. In general, the shorter the (loan) term, the lower the interest rate. A 30-year fixed will have a higher rate than a 15-year fixed rate. The longer it takes for a lender to be repaid, the greater the risk to the lender and thus the higher the rate to the borrower.
Loan amount is another factor to keep in mind. Generally speaking, there are three buckets for a loan amount for a conventional loan. Up to $417,000 is the bucket that will give you the lowest rate for a loan amount. The next category commonly known as “conforming jumbo” is from $417,100 to $625,500. Rates are usually anywhere from .125% to .375% higher for a loan at this level. Once you get above this loan amount you are in the jumbo category, and rates once again move up. Things will continue to change if you are borrowing from $625,600 to $1,000,000, and will change again when you go above $1,000,000.
Everything above is speaking in general terms, and each individual scenario can be different. Be informed when searching for a mortgage product to best suit your specific needs. The best way to do that is to consult with a qualified mortgage professional early in the process and get pre-approved. Then review all of your options.
Stuart Greenbaum is a lifelong resident of Bergen County, a proud graduate of Moriah and Frisch, and a member of Cong. Beth Tefillah in Paramus.
By Stuart Greenbaum
