Interest-rate-quoteThe pricing of interest rates are very nuanced, with (as many as) 12 factors influencing a borrower’s interest rate.

Pricing matrixes are confusing even to the most experienced MLOs; so, I’ve boiled this down to “the basics.”

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Below is a list of factors that affect a client’s interest rate.

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1) Property Type: Condominium, manufactured homes, and multi-unit dwellings (2 – 4 units) have higher interest rates than single-family houses.

2) Property Use: Rental properties and second homes have higher rates than owner-occupied properties.

3) Credit Scores: All loan rates are based on “risk-based pricing.” The higher the credit scores, the lower the rate. A borrower with a 740 (mid) Fico score could have a rate as much as .25% lower than a borrower with a 640 mid-score (2.25% vs. 2.5%).

4) Down Payment: The larger the down payment, the lower the rate. Typical thresholds are: Zero Down (VA),  3.5% down (FHA); 5% down, 10% down, 20% down and 25%+ (Fannie /Freddie)

5) Loan Amount: Very small loans (under $125,000, for example) can have fractionally higher rates, as can jumbo loans (over $1 million).

“Conforming” vs. “High Balance Conforming”: Every U.S. county has a basic loan limit (conforming loan limit) and then a “High Balance” conforming loan limits, which is typically .25% higher (2.75% vs. 2.5%).

For a list of loan limits for each county in California, click on my home page  

Loan Type: FHA and VA rates are usually lower than conforming (Fannie/Freddie) rates.

However, FHA has a 1.75% funding fee (rolled into the loan) and .85% monthly mortgage insurance payment.

The monthly fee is for the life of the loan (although there is an exception for a 15-year loan).

VA loans have no monthly mortgage insurance fee but have a funding fee (rolled into the loan balance) of 2.5 points.

For example: A $400k loan would have a $10k funding fee. However, if a veteran has a service-related disability, all or a portion of the funding fee is waived.

5) Rate Lock Period: Interest rates can be “locked-in” or guaranteed before the close of escrow for 15, 30, 45, or 60 days in most cases. The longer the lock period, the higher the rate/fees.

Many lenders quote rates associated with very short (15-day) lock periods, even though most escrows require longer lock periods.

6) Loan Maturity: The longer a rate stays fixed, the higher the rate. Typically, a 15-year loan is a half-point lower (2% vs. 2.5%) lower than a 30-year loan.

7) Fixed vs. Adjustable Rates: The “rate spread” between a 30-year fixed-rate loan vs. a 5-year adjustable-rate loan, is .125% (2.5% vs 2.375%).

8) Points/Fees: Lenders often have hidden points and fees in their quotes that they are not disclosing upfront when they quote a rate. Never pay points.

9) No Cost Refi’s: “No-cost” refinances have higher rates than refinances that have fees built-in. 

10a) Loan Purpose: Purchase vs. Refinance loans. Typically, “purchase loans” are fractionally lower than a “rate and term” refinance loan. (2.4% vs. 2.5%)

10b) Loan Purpose: Specialty loan products such as “land and constructions” have higher rates and fees (points) than typical loan programs.

Note: I have no sources of money to fund “land” or “construction loans“, for more information please click on the links above for general information.

10c) Loan Purpose “Cash Out Refi’s: When refinancing, borrowers increase their new loan balance to pull “cash-out” to pay off debts or home improvement.

11) Loan to Value (LTV) Loans under 70%  LTV has a lower interest rate than those above 70%.

Rates are higher depending on the “loan to value” ratio.

12) Lien Position: First trust deed loans have a lower interest rate than second trust deed loans. There is an exception; Heloc (Home Equity Line of Credit) are adjustable-rate loans with a typical “start rate” of 1%.