shopping for mortgage rates

Shopping for Mortgage Rates

Shashank ShekharCEO, Arcus Lending

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About Arcus Lending

• Arcus Lending is Mortgage Lender based in San Jose, California

• Products Offered: Residential Mortgages- FHA, Conventional, VA, 203K, HARP, HomePath, Reverse Mortgage, CHDAP, 80/10/10

• Geography Served: California, Washington and Oregon

• What are they known for: Legendary customer service, quick closing and rates that are consistently better than the leading banks

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Ab About Shashank Shekhar

• Shashank is the Founder and CEO of Arcus Lending• An Amazon.com Best-selling Author, Shashank is

widely regarded as California’s #1 Mortgage Expert• He is a National speaker, and a blogger who is

frequently tapped for his expertise by various national and local media including FOX, CBS, ABC and NBC

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• The information contained within this document is for educational purposes only. Every attempt has been made to provide accurate, up to date, reliable and complete information. No warranties of any kind are expressed or implied. Readers acknowledge that the author is not engaging in rendering legal, financial or professional advice.

Disclaimer

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Agenda

• Where do mortgage rates come from?• What is LLPA and how does it impact you?• What are the factors that impact mortgage rates?• Why a borrower may not qualify for the lowest

advertised rates?• Should a borrower pay points to get a better rate?• The #1 advice you can ever get on rate shopping

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Where Do Mortgage Rates Come From?

• Mortgage rates are based on Mortgage Backed Securities (MBS).

• MBS is a kind of a bond that trades on Wall Street every trading day. If there is more demand for MBS, the price of MBS goes up and mortgage rates go down. If there is less demand, then the inverse happens and the rates go up.

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Where Do Mortgage Rates Come From?

• The price of MBS gets impacted by several factors, but most importantly macro economic news. Better economic news usually means good news for stock market and bad news for bonds. For example when unemployment news is reported better than expected (meaning more jobs are created),MBS prices go down.

• Bottom line–better economic news is bad for mortgage rates.

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Where Do Mortgage Rates Come From?

• It’s a common misconception that the Fed sets the mortgage rates.

• While Fed’s policies may have an overall impact on rates, it doesn’t control the day-to-day changes to mortgage rates.

• So even though Fed some times doesn’t change the rates for several months or even years, mortgage rates can change on a daily basis.

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Where do mortgage rates come from?

• Mortgage rates and fees are determined on a theory called “Risk Based Pricing.” If a borrower is perceived to be a bigger risk, he might need to pay a higher rate and/or a higher fees.

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Understanding Loan Level Price Adjustment

• Loan Level Price Adjustment (LLPA) is adjustment to the rate/fees charged to a borrower based on his/her credit qualifications. This applies to conventional loans backed by Fannie Mae/Freddie Mac.

• LLPAs are assessed based upon certain eligibility or other loan features, such as credit score, loan purpose, occupancy, number of units, product type, etc.

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Understanding Loan Level Price Adjustment

• Credit Score–For conventional mortgages 740+ is considered an excellent score.

• Any score under 740 can result in higher cost or fees.• Assume a borrower’s credit score is 719. If he/she is

getting a loan amount of $400,000 with 20% down, he/she will pay a fees of $3000 extra compared to someone with a 740 score (see chart on slide 13).

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Understanding Loan Level Price Adjustment

• Loan to Value Ratio (LTV)–Higher LTVs mean higher rates.

• So if a borrower is getting a loan with as much as 40% down payment, he/she should get better rates than someone who only has 10% down.

• Again, assuming a 719 score, that would mean a difference in cost of 1.25% or $5,000 for a $400,000 loan amount. (see chart on the next slide)

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Understanding Loan Level Price Adjustment

• Loan Program–Fixed rate mortgages would typically have higher rates than an Adjustable Rate Mortgage (ARM)

• Occupancy Type–A primary residence or second home would get a better rate than an investment property

• Property Type–A condominium with less than 25% down payment will have a higher rate than a single family residence

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Understanding Loan Level Price Adjustment

• Loan Amount–The conforming loan limit is $417,000. But in some high cost areas like San Jose, CA the loan limit is $625,500. But the rates are higher on loan amounts over $417,000. Call us to learn about conventional loan limits

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Understanding Loan Level Price Adjustment

• Subordinate Financing–If a borrower is getting a second mortgage along with the first, he/she may end up paying a higher rate on the first.(See chart below)

• You can see how sometimes even a small difference in qualifying criteria could result in a significantly higher rates and/or fees. Usually the advertised rate assumes best case scenario- 40% down payment,740+ credit etc. Most of the borrowers normally don’t qualify for those rates

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Questions to Ask A Lender When Shopping Rates

• What’s the duration of Lock period?• Make sure that when you are quoted a rate, you are

asking the broker what the lock duration is. Make sure that lock period allows you enough time to complete your purchase transaction.

• Also, ask for lock extension policy. What happens if the lock expires and the loan hasn’t closed? How much is the lock extension fees and who pays for it?

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Questions to Ask A Lender When Shopping Rates

• Do you know what impacts mortgage rates?It’s important you work with a Loan Officer who knows what impacts mortgage rates and how they can change on a daily basis.

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Questions to Ask A Lender When Shopping Rates

• How would you advise me when is the right time to lock?Check with the Loan Officer if the/she tracks the MBS live. Even a small change of 12 basis points can impact the rate a borrower qualifies for. If the Loan Officer doesn’t track MBS live, he/she may not be able to advise of the right time to lock the rate.

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Questions to Ask A Lender When Shopping Rates

• Which of the estimated fees can increase at closing?The loan officer will provide you with a Good Faith Estimate (GFE) with details of your closing costs. But it’s just an estimate and can change at closing. So, ask the loan officer to explain every single item on the GFE and ask which ones can increase at closing. Understand why they would increase and by how much they can increase.

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Should You Pay Points or Not?

• Points are up front fees paid to obtain a better interest rate on a loan.

• One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

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Should You Pay Points or Not?

• If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000.Paying a point upfront saves $100 a month but it will take 30 months to recuperate the cost of that point.

• If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months

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Should You Pay Points or Not?

• Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.

• When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points

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• When you shop different lenders you get several interest rate and cost options. Sometimes it can be very easy to compare them.

• See the example below:– Lender1–Rate Quote–4.5%,Loan Fees-$1,000– Lender2–Rate Quote–4.5%,LoanFees-$2,000– Lender3–Rate Quote–4.5%,LoanFees-$3,000

• In this case ,it’s easy to figure out that Lender1 is an obvious choice. At other times, it can be very confusing to find out which one is the best option.

How to Compare Mortgage Rates?

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How to Compare Mortgage Rates?

• Let’s take a look at an example below:– Lender1–Rate Quote–4.5%,Loan Fees-$3,000– Lender2–Rate Quote–4.625%,Loan Fees-$1000– Lender3–Rate Quote–4.375%,Loan Fees-$4,000

• Annual Percentage Rate (APR) was introduced to make rate comparisons easy. But, different lenders calculate APR differently.

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How to Compare Mortgage Rates?

Here’s an easy way to rate shop, so that it’s really easy to compare different rate quotes: Do not just compare rates, compare fees as wellA lot of borrowers make a simple mistake –they call different lenders and compare the rates offered. They forget to ask for their fees. A lender with a lower rate could still turn out to be more expensive if their fees are significantly higher than someone with only a slightly higher rate.

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How to Compare Mortgage Rates?

Ask all the lenders to quote the same closing costFor example, ask them to give a rate with $2000 closing cost. If you are looking for a no cost refinance, ask for all quotes with zero cost. That way, all you have to do is compare the rates.

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How to Compare Mortgage Rates?

Shop mortgage rates in a very short period, ideally within couple of hours. Mortgage rates change frequently. You should be shopping with different lenders when the MBS is trading at the same level. Else, you won’t be comparing apples to apples. If you shopped with Lender A on Monday and Lender B on Tuesday, the market may be very different.

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How to Compare Mortgage Rates?

Don’t always go with the lender with lowest rates. This may shock you, but it’s trueBait and Switch technique–Sometimes when it’s too good to be true, it’s exactly that. Some lenders will rope you in with non-existent rates and then change the terms of the deal as you move forward with the loan process

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How to Compare Mortgage Rates?

• Bad reputation of lowest priced lenders – Most of the lenders who advertise the lowest rates, have very bad reputation. Don’t just look at their rates, be sure to also check their rating with the Better Business Bureau

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How to Compare Mortgage Rates?

• Closing turn times – Most of the purchase contracts are good for 30 days. That means you need to close the transaction within that time period. Make sure the lender you are going with, will be able to close the transaction within that time.

• Ask them to break it down with turn times for different steps of the loan process and then have couple of days of cushion.

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How to Compare Mortgage Rates?

• Accessibility – You need to work with a lender that works beyond 9am–5pm Mon-Fri.

• It’s going to be one the most important financial transaction of your life and you want to make sure you are working with someone who is accessible after hours. If you are a First Time Home Buyer, this is especially important.

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How to Compare Mortgage Rates?

• Check on Lender’s Expertise and Credibility - Consider the expertise and credibility of the mortgage lender. Google them to see if they have been covered favorably in media. Check their Yelp and Google+ rating and read client reviews.

• A well-versed consultant will ask you many questions about your short and long-term goals, and assist you in choosing a loan program that is truly suited to those goals

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How do you apply for a mortgage?

• Call (408) 615 0655• Email: Info@ArcusLending.com• Website: www.ArcusLending.com• Blog: www.LendingExpertBlog.com• FaceBook: www.facebook.com/ArcusLending

Licensing Info:Arcus Lending Inc, NMLS ID 1035734 and CA BRE #01857474Shashank Shekhar NMLS ID 8176

Shashank Shekhar NMLS 8176