Why your mortgage rate may be higher
By Michael D. Larson • Bankrate.com

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 higher.

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."