We constantly remind everyone that there is no “one interest rate,” because so many factors affect individual rates.
I linked to those factors here and set them out again below.
We often get questions though in regard to how much each of those factors affects a borrower’s interest rate, so I am providing some examples now.
A rate quote we often use for example purposes is for an 80% loan-to-value, $500,000 purchase of a Single Family Residence with a 740+ credit score and a 30-day lock.
Below are example rate quotes with different factors changed to illuminate how much those factors affect interest rates.
For the rates set out below, ALL factors are the same except for the one differing factor set out under the “FACTOR” column.
|Standard 80% LTV Rate Quote||2.875%*|
|639 Credit Score||3.875%|
In “normal” markets where there are no capacity or COVID-19 issues, the cost for longer lock periods is much higher than it is now. But lenders are encouraging longer lock periods with lesser charges to give themselves more time to process loans. Also, when some of the above factors are coupled on top of each other (such as low credit scores and small down payments), the effect on the rate can be as much as 2% or more.
Here are 13 factors that affect almost every borrower’s interest rate:
#1 – Property Type
Condos, high-rise condos and multi-unit dwellings (2 – 4 units) usually have higher interest rates associated with them, as compared to single-family dwellings.
#2 – Property Use
Investment properties have higher rates than owner-occupied properties.
#3 – Credit Scores
Credit scores significantly affect rates. A borrower with a 750 mid-score might have a rate as much as 1% lower than a borrower with a 670 mid-score.
#4 – Down Payment
The bigger the down payment, the lower the rate, in most cases.
#5 – Loan Amount
Very small loans (under $150,000 for example) can have higher rates, as can very large jumbo loans (over $3 million for example). In addition, “Low Balance” conforming loans under $484,350 will have lower rates than “High Balance” conforming loans (from $484,350 to $726,525).
#6 – Loan Type
FHA and VA rates are usually lower than conforming (Fannie/Freddie) rates, and our jumbo rates are currently the lowest of all for very strong borrowers.
#7 – Rate Lock Period
Interest rates can be “locked in” or guaranteed prior to close of escrow for 15, 30, 45 or 60 days in most cases. The longer the lock period, the higher the rate. Many lenders quote rates associated with very short 15 day lock periods, even though most escrows require longer lock periods.
#8 – Fixed Period/Loan Maturity
The longer a rate stays fixed, the higher the rate. For example, a 7/1 ARM (fixed for seven years) will usually have a lower rate than a 15-year fixed-rate loan, and a 15-year fixed-rate loan will have a lower rate than a 30-year fixed-rate loan.
#9 – 1st/2nd Combo Loans
Loans with a concurrent 2nd mortgage can have higher rates too, depending on the loan-to-value ratio.
#10 – Points/Fees
Lenders often have hidden points and fees in their quotes that they are not disclosing up front when they just quote a rate.
#11 – No Cost Refi’s
“No cost” refinances have higher rates than refinances that have fees built in. This is because lenders have to charge higher rates for a “no cost” loan in order to generate enough extra “commission” to be able to pay for closing costs on behalf of borrowers.
#12 – Cash Out Refi’s
When refinancing borrowers increase their loan amounts in order to pull “cash out” against their home, rates are usually higher depending on the “loan to value” ratio.
#13 – Reserves
Reserves are liquid funds left over after close, and they significantly influence interest rates because the most competitive jumbo lenders typically require ample reserves, e.g. 12 months of mortgage payments for all properties after close of escrow. This is significant because the best jumbo lenders sometimes offer rates that are as much as 1/2% lower than conforming (Fannie/Freddie Rates).
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