Are Rates really 2% or more higher?
The short answer is YES and NO. Not every lender was positioned to handle this crisis. It pains me to see some of my colleagues in the business be priced out of the market because their company is in a severe cash crunch. This soon will pass, but at this moment, there exist the biggest variance in rates among lenders that I've ever seen.
Normally we are all pretty competitive with each other. Call 3 different loan officers and you will get the same quote, give or take .125% in rate or cost. Now, i'm seeing the spread to be over 1% difference in RATE in some cases. One lender may be at 5% and another at 3.75%, no joke. So with some lenders quoting "high" rates, how do you still get a mortgage with acceptable terms and not lose your purchasing power?
How to not lose purchasing power
Because a lot of mortgage companies just aren't taking on new business, clients are faced with higher rates. Lenders are jacking rates up to slow down or even halt production. Note that this is NOT a capacity issue... it's a liquidity issue. One of my buddies joked this week that he was "glad to have a vacation" from the business! I digress... so here is what you should do to not lose your purchasing power.
Look Around, don't Shop Around
The first step is to look around, but not too much! I reiterate... look around, but don't shop. Find a rate and lock it in... the market is moving too fast. We had a client that went under contract on a new home over the weekend. The RATE she was quoted (and encouraged to lock) went up 1% in less than 24 hours. Looking around should help you find a loan that meets your needs. Shopping around (i.e. the back and forth among different lenders) will more than likely cost you versus save you money.
Purchase points, NOT Equity
Just recently i had the privilege of helping a client who was very distressed about the major changes to interest rates. Her loan officer came back with a new rate of 5% after just a few days before in the 3s. This was a conventional loan, 10% down with a 780 credit score. Because she was strapped to a certain payment and was tight on cash, she needed a loan with lower costs. But this was structured all wrong. You see, there is no magic to putting 10% down. 5% down is just fine and in fact it works out better. The idea is that you purchase points and not equity. Buy the rate down vs putting it into the down payment. it used to be that zero point loans were easy to find. Sometimes you could even get the lender to pay closing costs for you. Not anymore. Now, you need to find the "sweet spot" on the lenders rate sheet and just pay the piper to lock in the lower rate and pay the points. In this dear ladies' case, we lowered her cash to close, locked her in the mid 3s and kept her payment where she needed. A little structure goes a long way.
Finance or Pre-Pay your PMI (Mortgage Insurance)
Another way to increase your buying power is to remove PMI. PMI stands for Private Mortgage Insurance and it's a way the lender insures themselves in the event the homeowner defaults on their loan. When you reach 20% equity (or 80% loan-to-value) this requirement is removed. Monthly PMI is a monthly cost added to your escrow payment to pay for the lender's insurance policy. When you drop the PMI, your payment goes down thereby increasing your buying power. There are 2 ways to remove PMI.
Pay a lump sum. You have the option to pay an up-front premium to waive the mortgage insurance requirement. It's called "Single Premium". You cut the PMI company a check up front to just go away. This fee can be paid by the seller or the buyer. Remember my example from above? We didn't get any seller concessions, so we just had the buyer put 5% less down which provided enough capital to buy the rate down and REMOVE PMI. This is how we got her payment and cash to close down even though rates went up.
Finance the lump sum. Under certain circumstances you can finance the cost of the lump sum PMI waiver so you don't have to come up with cash or have the seller to pay it. This is very good for first time homebuyers that have a 5% down payment. They just finance the PMI cost resulting in a 5% down and no PMI loan. Brilliant. This structure may remind you of a VA Loan. The VA charges the borrower a "funding fee" and allows it to be financed. The difference in the VA loans is that this fee is waived if the borrower has a service related disability.
I am so blessed
I am so blessed to be working for a company that is laser focused on purchase business and has kept their rates at levels to still help our clients and realtor partners. I'm not the only "Steady Eddie" in the business so please follow my advice! Look around, purchase points not equity and remove PMI if applicable. I hope this was helpful!
www.loanwithrick.com with any questions.
