Why your mortgage rate may be higher
That low, low mortgage rate in
the glossy ad may not be available to you. Mortgage
lenders have all kinds of "markups"
they apply to certain customers.
A borrower's characteristics, the type of property
a home shopper wants to buy, the amount of financial data a person
will share -- these and countless other factors can prompt brokers
and lenders to tack on additional fees and interest rate premiums.
Fending off the fees
Consumers can avoid some of these surcharges, which boost the cost
of buying homes much like extended warranties and credit insurance
increase the cost of buying cars. But many don't even know they
exist, much less how to dodge them.
"It's really important for consumers to understand
they need to ask specifically what things are going to affect the
pricing on their loans or what things are affecting the pricing
on their loans," says Jim Kemish, president of Power Mortgage
Corp. in Delray Beach, Fla.
"They really need to ask and it's always good
to ask, 'Is there anything I can do to reduce the rate? Could I
reduce the rate by putting down more money? Can I reduce the rate
by putting down more documentation?'
"Frequently, they're going to get an answer that
there is a way to get the rate down or, at the very least, they'll
get an answer why the rate is what it is."
Remember that scene in Star Wars where Obi-Wan Kenobi
and Han Solo are negotiating the price of chartering the Millennium
Falcon? Kenobi tries to book passage on the cheap. But when he points
out that his party wants to avoid any "Imperial entanglements,"
Solo replies: "Well, that's the trick, isn't it . . . and it's
going to cost you something extra."
That's somewhat akin to what mortgage shoppers face
-- you can almost always get a loan, but if you want something out
of the ordinary, it'll cost you.
Many forms of markups
Loan markups (or "pricing adjustments" in industry lingo)
apply in all kinds of situations. Some stem from credit problems.
Borrowers with credit scores of less than 620, for instance, may
face rate increases.
Others apply to loans above certain loan-to-value
thresholds. At IndyMac Bank of Irvine, Calif., jumbo loans cost
one-half of a point more when they're made at 90 percent LTV or
Still other markups come into play on loans to purchase
certain types of property and loans for certain purposes. Customers
buying some condominiums, second homes and houses they plan to rent
out generally have to pay markups, as do consumers who want to cash
out a lot of their equity by refinancing.
One last group of markups applies to borrowers who
don't want to share information about their income, assets and employment.
Depending on how much documentation they're willing to provide,
they can end up paying anywhere from one-quarter of a percentage
point more in rate on up to two and a half percentage points more.
All of these charges can come as a surprise to borrowers
who think they're doing the right thing by shopping around.
The reason? When they call around to lenders or research
them online, they either don't bother to specify exactly what kind
of loans they're looking for or -- more commonly -- don't know they
have to and don't know exactly what loan parameters can hurt them.
So they're quoted rates, points and fees that apply to plain vanilla
loans up front, but end up paying much more at closing.
"People have no idea about that," says Richard
Staley, regional vice president of sales at Atlanta-based HomeBanc
Mortgage Corp. "It's our job as a mortgage banker to educate
them on why there's a markup, what's the reason behind it."
Know before you go
Knowing about markups can help borrowers avoid or minimize price
hikes. Consider that markups vary from lender to lender.
Someone who wants a low documentation, or "low
doc" loan, can spell that out when shopping and go with whatever
company offers the lowest markup for that kind of niche mortgage.
Borrowers have to be aware that markups can be hidden
in the points, the interest rate or some combination of both. Don't
just assume that a lender charging zero points is cheaper. Make
sure that lender's rate is better than the competition's too.
Kemish at Power Mortgage says that typically, a half
of a percentage point markup to the points on a loan is interchangeable
with a one-eighth of a percentage point increase to the rate. By
keeping these details in mind, consumers who need more than cookie-cutter
mortgages can avoid getting ripped off.
"It's really important to remember these
are specialty products," he says. "It is definitely worth
making several calls and shopping it carefully."