Monday, October 4, 2010

How to Determine the Interest Rate

We get calls every day from real estate agents, people interested in buying a house, and people interested in refinancing their current loan. Just about every conversation includes the question, "What's the interest rate?"

We never know the answer. Not because we're out of touch, but because we know that we need to have certain information before we can quote someone a rate (and not just be making it up). Here's the magic list of the things every lender needs to know before they can quote an accurate interest rate.

First the easy questions (most people know the answers to these):

-- What is the term of the loan (10, 15, 20, 25, 30, or 40 years)?
-- How big is the loan?
-- Is it fixed rate or adjustable rate?
-- Is it fully amortized (principal and interest payments every month) or interest only?
-- Is it a primary residence, a second home, or an investment property?
-- How many units are there? 1 unit, 2 units, or 3-4 units?

Next are the questions that about half the people can answer:

-- What is the credit score? "Excellent", "very good", "good", "fair", and "poor" don't help us because those terms mean different things to different people. Every 20 points in score below a 740 raises the rate for a conventional loan. The middle score of the borrowers' three credit scores is the one that counts. If there is more than one borrower, then the lower of the two middle scores counts.
-- What is the down payment?
-- What type of loan is it: FHA, VA, or conventional?
-- Is it a condo?

And finally, the questions that very few people can answer:

-- How long does the rate lock need to be? Every 15 days raises the rate.
-- Is there subordinate financing (a second lien)? Home equity lines of credit (HELOCs) count as second liens.
-- If the new loan is for a refinance transaction, is it a rate and term refinance or a cash-out refinance? The rules for this are very complicated.

Want to know the easiest way to tell if a lender is being honest with you? Ask for the rate. If they don't ask you all of these questions, they're just making it up.

And that's one of the reasons we have so many foreclosures!

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