New mortgage rate record; What is a “first level” scenario?
Mortgage rates are on a tear, with the average lender easily hitting new all-time lows today. Is it that low? At this point, it’s safe to say that anything over 3% is too high as long as we’re talking about a leading scenario. So let’s take a moment to discuss what might separate one scenario from another.
1. Loan to value ratio (LTV)
As its name suggests, this is the ratio between the amount of the new loan offered and the value of the house in question (note that the purchase price is used if it is lower than the appraised value. ). This is one of the two most important considerations that determine the price range in which your loan quote would fall. By the time you get an LTV of less than 75%, you pay almost no additional interest, but there is a very important caveat.
2. Credit score (FICO)
This is the important caveat. If the midpoint of your 3 credit scores (as drawn by your mortgage lender) is greater than 740, then the above conclusion (around LTV
This is whether you will live in the house as your primary residence or if you will rent it out. There is one small success for a bona fide second home, so our focus will be on the success of the investment property instead. On that same loan of $ 300,000, the difference between the owner’s occupancy and the investment property is approximately $ 6,400 up front. Unlike the credit score, this one will not go away if you lower the LTV. And if you can’t get below LTV 75, be prepared. It will be close to $ 10,000 at 80LTV and over $ 12,000 for anything over. And that’s BEFORE any credit score adjustments.
If you don’t just pay off purchase cash loans when refinancing, you will be affected by a withdrawal adjustment. In our 75LTV example, this will cost you just under $ 2,000 assuming the 740+ credit score and $ 3,000 if you have between 700 and 740.
The above aspects are the big 4 when it comes to pricing loans, although there are several other potential factors (condos, multi-unit homes, high balance adjustments, subordinate financing success, etc.). The point of delving into this is to add clarity to the notion of a “top-level scenario”. Simply put, this would assume at least 25% equity (75 LTV), a FICO of 740+, no withdrawals on refi, and owner occupancy.
The current pricing environment is very favorable to these scenarios but relatively brutal for everything else. This is a normal by-product of a large and sustained drop in rates. Even if we only change the credit score to 679 and leave everything else in its prime position, the average lender should still increase your rate offer from 0.375% to 0.50% to keep your initial closing costs unchanged. Either that or you can simply choose to pay an additional 2.25% of your loan amount at the closing table.
Principal’s point of view
My rate sheets are about the best I’ve seen. Yes, the bond rally can continue but I think future gains will be very, very slow. Customers right now prefer to lock in and I think that’s the best call. –Victor Burek, Churchill Mortgage