Have you ever called a mortgage lender and asked them what the rate is and get twenty questions? It irritated you so you called someone else who easily quoted you a rate. When you went to lock this rate in, it changed? Did your neighbor, brother or friend get a better rate than you and you don’t understand why?
Rate = Risk. When you make a brief phone call inquiring to banks and lenders about what your rate would be they have no idea of the complete borrowers profile, if you pressure them and do not ask or answer their questions you will more than likely get quoted a base rate, which is likely to jump if there is any risk associated to the loan. The more risk associated with the loan the higher the rate.
Here are some factors that can cause your quoted rate to rise:
Credit score—the lower your score, the higher your interest rate will be. If yourcredit score is lower than a certain number (usually 720 sometimes 740) you should expect an increase in rate and the more your score drops away from these scores the higher it can be.
Purchase Price– to get the best rate you want to have a loan amount of at least 150,000. The lower the purchase price and/or loan amount goes the higher the rate will go. It also works in reverse as the purchase and loan amount go higher than 417,000 it becomes a jumbo loan and the amount risk associated in the loan goes up.
Loan to value of the home– this is usually based on the purchase price or appraised value versus the difference of the loan amount; an 80,000 loan on a 100,000 purchase price is an 80% loan to value. The lower the loan to value means you have more equity in your home and are less of a risk to your lender. (If you foreclose they are not taking as big of a loss) This can also affect the type of loan you get, if you put 20% down you more than likely will get a conventional loan, if you put 5% or less down you will probably go FHA. These two loan types come with different mortgage rates and different bumps to the rate.
Occupancy type– if this is your primary residence you are going to be less risk because you will be occupying the property. A second home as well as an investment property will add to the rate since it is easy to walk away from in tough times as well as you not living there to keep up with little maintenance issues like you would your primary residence.
Assets-The more money the borrower has, the stronger the loan but it does not always affect the rate… but can in some private investor backed loans
Debt to income– like assets it does not always adjust the rate but if you have a higher debt to income and they make an exception to do the loan some investors will raise the rate because they are taking more of a risk). Things that make up your debt are credit cards, car and other installment loan payments, student loans (sometimes are not if they are deferred), any payments reported to the credit bureau as well as child support and alimony.
Cashing out when refinancing– Anytime a borrower takes cash at closing when refinancing his/her home, this will raise the interest rate because you are adding risk by taking away equity in the home and raising the loan to value. A cash out refinance is getting a check at closing, consolidating other debts (such as a car loan or credit card debt) into your home loan, and combining a 1st and 2nd mortgage (or equity line) if the 2nd mortgage was not open at the time of purchase.
There are more items that can cause the rate to rise and fall but these are some main factors. Also note that the rates can change everyday and sometimes several times a day, it depends on the stability of the market. Learning about what makes up your rate can definitely make you a better shopper and arm you with better questions when shopping. In the big picture of mortgage rates remember that the rates you are currently being quoted are some of the best rates that anyone has ever been given… even with the small bumps added!