In mortgage lending, what you see is not always what you get. The mortgage rates that are advertised by lenders aren't always available to average consumers. Even so, there's a very good reason not to ignore them. Understanding the assumptions behind advertised mortgage rates can help you budget your home loan more effectively.
Throughout most of 2010, Freddie Mac's Primary Mortgage Market Survey has reported average mortgage rates in the 4 to 5 percent range. At the same time, lenders have been pitching rates in the 3 percent range and sometimes even lower. What gives? It comes down to this: Freddie Mac's survey is based on actual mortgage loans, while advertised rates are based on assumed conditions and qualifications.
A perfect world
Lenders develop advertised mortgage rates based on the best possible conditions, which may or may not apply to your particular situation. If you're reviewing advertised mortgage rates online, you can usually locate fine print that describes the specific assumptions involved. Each lender defines these independently, but some common parameters are:
- a minimum credit score of 740
- a loan amount of $350,000
- 30-year, fixed-rate mortgage
- maximum loan-to-value of 60 percent or 80 percent
- 30-day rate lock
- establishment of an impound account for taxes and insurance
Even a slight difference in any of these factors would result in your mortgage rate being higher than the advertised one.
Lenders may also make adjustments based on the details behind the above factors. Take the credit score, for example. Lenders will review the amount of debt you have and your required debt payments. They'll also analyze how frequently you open new accounts, and the amount of credit you use relative to what's available.
Using advertised mortgage rates
Advertised mortgage rates can still be useful, even when they're not exactly reflective of your situation. If you're just beginning the shopping process, make a spreadsheet of the various rates you see. Locate the fine print and record the assumptions. Where they're roughly similar, compare rates between lenders to see which one appears to have more competitive offerings. You may also stumble upon rates that reflect your situation. Don't disregard a lender just because the rate looks higher than others you've seen.
Closing the gap
Once you start collecting personalized quotes, you'll have a better idea of how different your rate will be from the advertised ones. Don't throw in the towel if this difference is a budget buster. You still have options. The easiest strategy is to buy down your rate with points paid up front. Your lender may have other suggestions, as well, such as increasing your down payment, or paying off some credit accounts. If these alternatives are outside your reach, consider delaying your loan while you work to improve your credit score.
Advertised mortgage rates don't have to be confusing or misleading. Use them to your advantage by knowing how to uncover what they really represent.