Why is rate higher than advertised?

Posted by  on Apr 21, 2009

Ever wonder why the average mortgage rates paid in this country according to Freddie Mac's weekly surveys are so much higher than rates promoted by lenders? Look at advertised rates in the newspaper, on billboards, and online. Today one lender is selling a 4.25% rate on a 30-year fixed mortgage. With an APR of 4.51%. Which on a $260,000 loan means it will cost about $10,000 to get this loan. But wait, there's more. The lender's advertised rate is just the starting point.

Because most home loans in this country are packaged and sold on secondary markets through Fannie Mae and Freddie Mac, they are priced according to the policies of these giants. And that means risk-based pricing adjustments for anyone who isn't a candidate for fiscal sainthood.

For example, a lender might advertize a 4.75% 30-year fixed rate mortgage with a one point origination fee and about $2,000 in closing costs. Fair enough, at a $400,000 loan amount your APR is 4.88%. But, oops. Look at Fannie Mae's Loan Level Pricing Adjustment Matrix. Otherwise known as the Chart of Death. Everyone pays an "adverse market delivery charge" of .25%. You have good credit, 20% equity, and a FICO score of 720. But oops again, your score is actually 719. Too bad, that's another .75%. No exceptions. Oh, and you have a condo, that's another .75%. Too bad. Now your APR is 5.03% and you are paying $13,000 in fees.

So when shopping for a mortgage, do more than ask for rates. A good loan agent should be asking YOU the questions before he or she can offer a meaningful interest rate quote.


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