This is the third installment of Mortgage Week here at Suburban Dollar. Now that you have found a good broker and decided to get a fixed rate mortgage, you did decide on a fixed rate right, we are going to talk about how your rate is determined, what points are, and why you may or may not have to pay Principal Mortgage Insurance (PMI).
What is a Par Rate and How is it Determined
Par rate is the base rate charged by a lender, this rate requires no buy down and the broker gets no Yield Spread Premium (YSP). This rate is pre-adjustments, fees, or yield spread premiums charged by the broker. The Par Rate is then adjusted based on several factors such as:
- Credit Score: Your Fico is going to play a part in determining your base rate, the better your score the better your rate is going to be, a 720 or higher is going to provide the best rate without penalty. Lower than 720 and you are looking at potentially .50 to .75 point penalties depending on the lender.
- Loan to Value: Your percentage of equity vs your mortgage is taken into consideration in determining your base rate. While everyone tells you to shoot for no more than 80%, the rate schedule I am referencing actually penalizes you more for being between 75%-80% LTV.
- FHA Vs. Conventional: Whether or not you choose to go conventional vs. FHA is going to affect the base rate, FHA loans are more limited in the funding options than conventional mortgages.
- Lock Period: The length of time you choose to lock your rate for could also affect your final rate. Where par may be 4.625% for a 21 day lock, it could be 4.750 for a 35 day lock. You have a better chance of getting a lower rate the less time you need to get your loan funded.
The below screenshots are of an actual wholesale lender rate sheet. 100.00 is par, anything below will cost the buyer money to get to that rate, anything over will result in the lender paying the broker (and he has a wife and kids so he needs to get paid):
The following is the adjustments based on credit score, negatives cost you and positives will save you a little:
What are Points
Points are essentially fees paid by you to the lender/broker. Points are essentially just a percentage of the loan amount so 1 point will cost you 1% of the value of your loan. Points could show up either in the form of Origination Points or Discount Points.
Typically you will pay origination points in the form an origination fee, the origination fee is typically going to be around 1-2% of the value of your loan. As we discussed yesterday origination points are for the brokerage/lender to recoup the administrative costs of completing your paperwork and the amount of these fees may be negotiable.
Discount points are points paid to buy down the rate on the loan. Using the above lender rate sheet if you wanted a 50 day lock at 4.5% you are looking at at least .75 points to buy down the rate, this does not include any additional buy down charges by the broker. With discount points you are paying upfront to reduce your rate over the life of the loan. If you aren’t planning to stay in your house for an extended period of time it may not be worth the upfront cost to buy down your rate.
Principal Mortgage Insurance (PMI)
Back in the middle of the real estate boom, when I got my loan, it was very common for people to be getting 100% financing from lenders basically for just showing up at the door. The most common way of doing this was to finance a first mortgage for 80% and a second mortgage for 20%. This allowed you to keep your Loan to Value (LTV) below 80%. This type of loan arrangement is pretty hard to come by these days so more people are having to deal with the dreaded PMI which comes into play when the value of your mortgage is greater than 80% of the value of your house.
PMI is a type of insurance placed on your mortgage by lenders, (think AIG here), that ensures that you are going to pay your loan back and not go into default on the note. Most lenders will require you to pay for that PMI if your loan to value is above 80% on the loan for which you are applying. This is a pretty steep fee to be paying, in addition to interest, principal, and escrow. It is in your best interest to be able to bring enough of a down payment to the table to keep from paying PMI, but all is not lost. If at any point during the paying down of your mortgage your LTV gets to that magic 80% mark you can pay for an appraisal and get the mortgage company to take the PMI off.
The Rest of Mortgage Week:
05/05 – What is a Mortgage Broker
05/06 – Fixed Vs. ARM Rate Mortgages