The following excerpt was my response to a client whom asked me the question in the title. Her response afterward led me to think that some of my fellow investors could benefit from knowing this information from a Lender’s perspective.
So, if you’ve ever called around for quotes on mortgage rates and wondered WHY it is SO hard to get a straight answer from the LO, chances are, you aren’t getting the “run-around”. Hopefully this will help you to understand why it’s NOT an easy question to answer…
NOTE - This applies to Conventional Mortgages, NOT Hard Money or Transactional Funding.
That’s a good question. Unfortunately, the answer isn’t so simple, but since you asked, I will attempt to explain it as simply and clearly as I can…
The first thing to understand is that mortgage interest rates (of ALL mortgage lenders) are directly tied to the 10yr. US Treasury Bond.
When bond prices move (up or down) interest rates move in direct proportion. And they fluctuate in real-time several times throughout the day. So, until your interest rate is locked, it is subject to market fluctuations.
Secondly, when companies advertise interest rates, (and depending on how they are advertising it, i.e. print ads are more subject to market fluctuation due to the amount of time it takes to get a marketing piece printed and mailed out to potential borrower’s, whereas online ads can be changed more rapidly to more accurately reflect the market at that moment) they typically advertise that day’s best pricing.
Typically, the best pricing (lowest interest rates) will be offered to a borrower with:
- Excellent (perfect to near-perfect) credit
- Low Debt-To-Income ratio
- Primary residence
- Low Loan-To Value ratio (i.e. putting 20% or more down, which lowers the LTV and also serves as the threshold where Mortgage Insurance (a separate topic) is no longer required on the loan.
This is the “perfect borrower” scenario and serves as a starting point, then come the risk-based pricing adjustments…
There are many variables that will affect the interest rate charged to a potential borrower based on several risk factors:
When you are purchasing an investment property, or 2nd home, there’s an adjustment for that, for example (+.25% from the “advertised” rate).
When your credit score is below 800, there are adjustments that occur at various thresholds. So, below 780 (+.25%), below 740 (+.25%), below 700 (+.25%), below 680 (+.25%) etc…
When your LTV is greater than 80% (+.25%)
So, to understand WHY your interest rate might be higher than what you see advertised, consider your scenario compared to the one outlined above and how far it deviates from the “perfect borrower” scenario.
In your case, we’ve got:
- 2nd Home
- 10% Down
- 677 Credit Score
With that said, you can always get a lower interest rate by “buying down” the rate, but we typically advise against it because it rarely makes financial sense to do so.
Unless you are running an extremely tight DTI ratio and NEED the lower rate to bring the DTI ratio into tolerance AND have the cash available to buy the rate down, AND plan to keep the property for more than 5 years. We can explore this in more detail if you would like, but in your case, we don’t have a DTI issue and buying the rate down probably wouldn’t make sense for you.
I hope this explanation helps. Please let me know if you have any more questions or need any clarification.
Like I said, I’ll be watching the market like a hawk and looking to lock at the lowest possible rate for you.
NOTE - I know I could have gone into alot more depth and elaborated in a few areas, but like I said, I was trying to keep it simple so as not to overwhelm the client with TMI Anyone on this forum can feel free to contact me here for more info.