5 more factors that could influence your mortgage interest rate
The Consumer Financial Protection Bureau (CFPB) this year introduced an interactive mortgage rate tool with a blog post titled “7 Factors that Determine Your Mortgage Interest Rate.” The tool and blog post have drawn a lot of attention.
I’m going to steer clear of the debate around the tool, and instead offer some thoughts on additional factors that influence mortgage rates.
We at Bank of the West believe the more information buyers, sellers, and homeowners have the better equipped they are to make smart decisions about their finances. That’s why we spend a lot of time on this blog and elsewhere educating consumers about the home-buying process.
The CFPB’s tool does help educate consumers about some of the factors that influence their mortgage rates. These include FICO score, down payment size, loan type, the term of the loan, and the state where you’re buying property, as the CFPB explains. Using market data from some mortgage lenders, the tool suggests what mortgage rates a consumer should expect based on the state, FICO score, and other information plugged into the tool.
Conceptually the tool is a solidly good idea. It has plenty of useful information for consumers to absorb. As a tool to help educate prospective homebuyers, it is useful.
Note, however, that you may not actually receive the rate that you expect by using the tool. Here are five additional considerations that can influence a mortgage rate that are not included in the online tool:Points: Points, or discount points, are an upfront payment by a borrower that lowers the interest rate – and, therefore, the monthly payment, on a mortgage. Each point equals 1% of the loan amount, so one point on a $200,000 mortgage is $2,000. Read the fine print on the CFPB tool or any mortgage rate offer to be clear about the discount points associated with the proposed interest rate. The CFPB says the rates shown on its tool assume points ranging from 0.5 to -0.5 (negative points are a credit for the borrower). Condos: Buying a stand-alone house versus a duplex, a townhome, or a condo may affect your mortgage rate. Condos historically have a higher default rate and limited resale appeal, and so that added risk is priced into a mortgage on a condo through a potentially higher interest rate or an up-front fee. Cashout refinance: Buying a house versus refinancing are two different kinds of transactions. If a borrower has built up equity and is taking out cash in a refi, many lenders may offer a higher rate based on cash being taken out of the home with the refi. Second homes: I suspect the CFPB tool will be used primarily by first-time buyers or consumers who are relatively new to the home buying process. But for more experienced buyers, keep in mind the tool assumes you’re going to live in the home as your primary residence. If you’re looking for a loan for a vacation home or an investment property, the calculator doesn’t account for those factors. Secondary financing: A second mortgage is an important consideration for a lender in determining rates. Holding two loans on a property may mean added risk for the lender, and the primary mortgage will be priced accordingly.
The more information you have about home buying and the mortgage process the better off you’ll likely be. If you have comments or questions, you can post them here, and we’ll be happy to share tips. If you have a specific question about your personal mortgage needs or a pending loan application, we will connect you with the right person who can help.