Loan Rate Sheets: An example, and the games lenders play

This is something I probably should have covered quite some time ago, as it's part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect a few days ago. These are Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. Now, I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than anyone else, nor does any other loan provider.

rate 5.625 5.750 5.875 6.000 6.125 6.250 6.375 6.500 6.625 6.750 6.875 7.000

15 day 1.50 1.00 0.375 0.00 -0.50 -1.00 -1.50 -1.75 -2.25 -2.50 -2.75 -3.50

30 day 1.75 1.25 .625 0.25 -0.25 -0.75 -1.25 -1.5 -2.00 -2.25 -2.50 -3.25

45 day 2.00 1.50 0.875 0.50 0.00 -0.50 -1.00 -1.25 -1.75 -2.00 -2.25 -3.00

As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. For most people, the column you want to pay attention to is the thirty day column. Two weeks from a standing start is not enough to do a refinance, and even a purchase is iffy. But you want a rate locked in when you start the process, or you really have no idea whether it will be available when you get to the end of the process. Indeed, many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. That's why you want a written guarantee of a rate at a given price on a given loan type.



Now this is a fairly broad spread rate sheet, as the company is willing to take clients through a large range. On the other hand, at a 5/8ths point hit for 1/8th percent rate below 5.875, they are telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).



Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.



But the devil is in the details, and one of the most common devils is details is a provider forgetting the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Mortgage Loan Disclosure Statement is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:



Loan amount under $60,000: half a point

Loan amount $60k up to $100k: quarter of a point

cash out loan, 70-80% LTV: half a point

cash out loan, 80-90% LTV: three quarters of a point

Investment property 50-75% LTV: one and a half points

Investment property 75-80% LTV: two points

Investment property 80-90% LTV: two and a half points

No Impounds fee: quarter point

2 units 90-95% LTV: half a point

Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)

Loan distribution

80/15/5 quarter of a point

75/20/5 quarter of a point

Interest only one and one eighths points

if CLTV over 90%: additional quarter point

97 percent of purchase price financed: three quarters of a point

100 percent of purchase price financed: one and a half points

2/1 Buydown two and a half points

Stated income FICO 680-699: half a point

Stated income FICO 700+: quarter of a point

(actually, these are small hits for stated income, indicating to me that I can likely do better elsewhere for a full documentation client!)



So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above.



If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)



Doing 100% financing on a $50,000 home: Two points.



One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!



(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).



Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.



Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchse, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan. In order to combat this, do the smart thing, and apply for that back-up loan at the beginning. With two loans ready to go, your bargaining position is much enhanced, and the odds are much better that one of them will honor the original quote or something similar. If you can't find a backup loan provider, an alternate tactic is to find someone who will guarantee their loan quotes in writing, but very few will. A quote that is not guaranteed is so much hot air. They might intend to deliver, but the reason they won't guarantee it is usually that they don't intend to deliver it.



Caveat Emptor.