Posts Tagged Interest Rates

Why the Zillow / AOL joint venture is a very unholy union

Zillow just doesn’t provide inaccurate property values anymore, they are now teaming-up with AOL to provide a mortgage calculator, “real-time” mortgage rates and personalized loan quotes. The problem here is that since Zillow doesn’t originate loans, they are free to give-out inaccurate loan information as well as property value information.

Simply put, what mortgage interest rate a borrower gets is far more complicated than an online calculator or “personalized loan quote” can give you. There are way too many variables. These are just a few:

  • State, county or even the city where the property is located in
  • Actual FICO score of the borrower, not just an estimated “Poor/Good/Excellent”
  • Loan amount to purchase price or appraised value ratio (LTV or Loan-to-Value)
  • Property type (single family residence, duplex, condo, town home, manufactured, etc.)

Without quite a bit of detailed information, and a talk with an actual loan officer, you are getting nothing but pie-in-the-sky numbers that will mean nothing when you actually close the loan. This is why on my Get Approved! page I ask just some basic questions so that I have a rough idea of your needs before I call you. But to give you accurate information regarding your situation, I need to talk to you. And I pride myself on the accuracy of my quotes. When I give you a quote I am pretty certain the loan will close how I quoted it with no surprises for you at the closing table.

Cory Ure
Medallion Mortgage
Salt Lake City, UT

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Why quoted mortgage interest rates differ from advertised rates

Advertisers always promote their low price leader items to get customers in the door.  This is effective at getting people into the store to buy what they need, which usually differs quite a bit from what they came in to buy.  Cars advertised by auto dealerships are usually the base models with the fewest options so that the price and payment advertised are the very lowest.  Carpet shampooing businesses advertise their rate for one room hoping when you see how wonderful it looks you’ll go for the whole package with Scotch Guard and all.  Full service car washes advertise the basic wash price than sell value-added add-on’s like hot wax and Armorall’d interiors.

Mortgage interest rate advertising is much the same.  Lenders, banks and credit unions always advertise the best-case scenario for rates.  What is the best case scenario? It’s one where no “risk-based pricing” exists.  This scenario is:

  • 740+ FICO score
  • 80% or less loan-to-value
  • Purchase transaction
  • Single Family Residence
  • Owner Occupied

Any deviations from this scenario could result in a higher actual mortgage interest rate for the borrower, depending on the loan program.  Lower credit scores and higher loan-to-value on a property represent higher risks to Wall Street investors backing the banks, credit unions and lenders, therefore they try to minimize their financial exposure by increasing rates for these scenarios.

Also, some programs have bigger “hits” than others for the same “risk”.  For instance with Conventional 30-year fixed mortgages from Fannie Mae and Freddie Mac the interest rate increases for FICO scores lower than 740, and increase more and more for about every 20 points lower you go.  FHA and VA don’t have any FICO score risk-adjusters from 850 all the way down to their minimum allowable.

Conventional Fannie Mae and Freddie Mac loans have higher interest rates for higher loan-to-value ratios and rates get a little better for LTV‘s lower than 60%.  FHA and VA have no hits to rate for LTV up to their maximum (96.5% for FHA and 100% LTV for VA).

This is why many times the rate quoted to you may be different than the rate advertised.  It all depends on the borrower’s particular credit and property qualifying.  And sometimes one loan program may be better for your particular situation than the one you originally thought you wanted or needed.

Contact me with any questions you may have.  I am more than happy to explain all the variables and help you choose the right loan for your personal situation.

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APR, what is it and why it doesn’t matter

You see APR after every interest rate quoted, whether it’s for an auto loan, credit card or a mortgage loan.  What does mean?  How is it calculated?  Does it really matter in the larger scheme of things?  All good questions.

APR means “Annual Percentage Rate”, which is a number that is supposed to somehow tell you the “true” cost of a loan.  The idea is that this number reflects the actual cost of a loan based on any fees required to originate and fund it.  With credit cards the interest rate and the APR are almost always the same because they just give you the credit card and there are not  closing costs involved.  Same with most auto loans.  But with mortgages the quoted interest rate and the APR are almost always different.  Here’s why.

APR is figured by subtracting the fees associated with originating a loan from the loan amount than re-amortizing the payments you’ll make to come-up with “true” cost of the loan.  So if your loan is $200,000 and there are $7,000 worth of fees associated with the loan, the APR would be the dollar amount of actual payments over the term of the loan recalculated into $193,000 rather than $200,000, hence the sum is a higher percentage.

Originally, our government came-up with this figure in an attempt to simplify the home loan shopping process since a borrower could go around to various lending institutions armed with this one figure to see who had the best deal.  However, it doesn’t really work that way because there are way to many variables, both in loan products and in what is considered an “APR item”.

First lets look at what are considered APR items.  HUD says that any fee associated with originating a loan that would not be associated with a cash transaction is an APR item.  However even that is left to the lender’s discretion.  For instance, on the Good Faith Estimate anything in the 800-series section should be considered an APR item as well as Per Diem interest (the interest that has to be prepaid from the closing date of your loan to the first day of the next month) and of course things like up-front fees for mortgage insurance or funding fees through the VA and escrow fees from a title company or attorney.800-section-gfe1

Some of these items are self-explanatory, such as “Loan Origination Fee”, “Credit Report”, “Mortgage Broker Fee” and “Underwriting Fee” because you wouldn’t have those fees if cash were exchanging hands.  However some other such as appraisal and title escrow fees could or could not be included, and lenders use this to their advantage when quoting you so that their fees/APR will look more competitive.  They will leave-out appraisal and title fees since in a cash transaction you may not get an appraisal done or have a title company handle the money transaction or issue a title insurance policy.  But lets face it, it would be financial suicide to buy a home without knowing how much it’s really worth and having a third party handle the transfer of funds from buyer to seller is the safest way to go since they won’t release the funds to the Seller until the title is recorded with the County Clerks office the the Buyer is the legitimate owner of the property in it’s entirety.   Also, title insurance guarantees the buyer that the title is clean and free of encumbrances (liens from collection agencies, bail bonds, contractors, angry neighbors, etc.) and guarantees that if one shows-up for the Seller after the transaction that it won’t effect the Buyer.

So the smart move, even in a cash transaction, is to get an appraisal and use a title company or attorney to complete the transaction and get title insurance.  So legitimately these fees should be included, but many lenders don’t to be more competitive in their quotes.

Second, APR is calculated assuming the loan will be held to term (10, 20, or 30 years) and never refinanced or the house sold.  The fact is that people move on the average of every 7 years and refinance every 4, racially skewing the APR calculation and making it worthless in the real world.

So in my opinion, the only figures that matter in a purchase or refinance transaction are:

  1. What’s the interest rate?
  2. What’s the monthly payment? (Remember, the lowest interest rate doesn’t always equal the lowest payment)
  3. What are the closing costs involved?
  4. How long will it take to amortize and recoup the closings costs? ( In a refinance scenario)
  5. Who is paying the closing costs? (In a purchase scenario)

This is where a mortgage professional can sit down with you in person and answer these questions for you and show you the mortgage options available to you.

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