Wondering why you didn’t receive the low mortgage rate you saw advertised on TV or the Internet?
Well, there are a ton of reasons why the quote you obtained was higher than anticipated. Let’s explore a lot of them so you can actually get your paws on that low rate.
1. Low credit score
This is a biggie, if not the biggest reason. Most lenders assume (for the sake of their super low advertised rates) that you have stellar credit.
So if you take the time to read the fine print, it might say something to the effect of “minimum 740 FICO score.” That means your interest rate will be higher if you don’t have a credit score that high.
Fortunately, the fix is easy…work on all three of your credit scores ahead of time to ensure they’re where they should be and you won’t be hit with any unnecessary pricing adjustments.
In fact, you could even get a pricing break in the process if your scores are really good! Just keep in mind that it could take time to see a boost in your scores, so take action early.
2. You don’t occupy the property
Mortgage lenders also tend to advertise rates on the basis that you’ll occupy the subject property.
If it’s not going to be your primary residence, expect the mortgage rate to be significantly higher.
Simply put, second homes, also known as vacation homes, and investment properties create more risk for lenders, and they must adjust their rates higher to account for that.
Aside from a higher interest rate, you’ll also be more limited in terms of how much you can borrow.
For example, the max loan-to-value (LTV) ratio may be lower on properties you don’t occupy year-round.
Sadly, there’s not much of way around this if you’re an honest borrower.
But you can plan ahead and refinance a mortgage on a property you currently occupy, but plan on renting out at some point in the future.
3. It’s a condo
Speaking of the property, you might be subject to a higher mortgage rate if it’s a condominium or townhouse.
Again, these properties are riskier to lend on for a variety of reasons, and as such, you will pay more in most situations.
However, you might be able to avoid the condo pricing adjustment if you keep your loan-to-value below a key threshold, such as 75%.
Of course, not everyone has that type of money lying around, or the required equity to do so.
Also note that lenders often hit borrowers if the property is a manufactured home.
4. You need a longer lock period
Another reason your mortgage rate may tick higher is if you lock in said rate for a long period of time. Perhaps you like mortgage rates where they are, but don’t plan to close for a couple months.
The benefit of that guaranteed low rate for a longer period may cost you…and it could turn out that rates move lower over that time, not higher.
Of course, not everyone likes to take risks and you could still come out ahead if they rise.
Just note that you might be able to take advantage of a float down instead and get the best of both worlds if rates do improve.
5. The loan amount is big
Most banks and lenders advertise conforming mortgage rates. These are good up to $548,250 for the year 2021.
If your loan amount is higher than that, you could face a higher mortgage rate because your loan will be considered either high balance or jumbo if really large.
If you’re close to this limit, you might be advised to lower your loan amount slightly to squeeze under the maximum and snag the corresponding lower interest rate.
This can certainly be a good strategy if you’re super close to the limit and the rate improvement is substantial. Take the time to explore different scenarios.
Interestingly, some lenders that specialize in jumbo loans may actually charge higher rates to those with smaller loan amounts, so be sure to shop around too.
6. The loan amount is small
Yes, it might sound crazy, but you can actually pay more for a smaller loan amount too.
I’m talking much smaller than the conforming loan limit, say $150,000 or less. Or below $100,000. This threshold does depend on the lender in question.
Of course, some banks and lenders might be happy to take such a loan without an adjustment whatsoever.
So if you’ve got a small loan amount, put in the time to find the right lender for your situation. And pay attention to the lender fees while you’re at it!
7. It’s not a home purchase
While a purchase and a rate and term refinance are generally treated the same when it comes to mortgage rates, you’ll probably get stuck with a higher mortgage rate if you need to cash out.
Lenders charge a premium when you need to extract equity from the property, so expect a pricing hit for a cash out refinance.
You can even get hit if it’s a rate and term refi since data show that purchase loans perform best (why are refinance rates higher?)
Additionally, understand that your LTV will likely be much more limited when cashing out.
8. The LTV is high
Speaking of LTV, the higher your loan-to-value ratio, the higher your mortgage rate, all else being equal.
Again, this has to do with risk, something all lenders are undoubtedly concerned about when doling out home loans.
While it’s great to have low-down payment options such as the Home Possible program that requires just 3% down, the mortgage rate will be higher compared to a loan with 10% or 20% down.
Again, if you’re close to a certain LTV threshold, you may want to do the math to see if bringing in more at closing money makes sense to get the rate down.
9. Multiple units
Another way your mortgage rate may get driven higher is if the property has multiple units.
While you’re generally safe from a rate increase if it’s just two units, a 3- or 4-unit property could cost you significantly more in interest over time.
Combine it with non-owner occupied status, which is a common arrangement for a triplex or fourplex, and the interest rate can shoot much, much higher.
10. You took a lender credit
Not a fan of closing costs? Neither am I, but if you want a home loan with low or no out-of-pocket costs, expect a higher mortgage rate in exchange.
Lenders are more than happy to provide you with a lender credit to offset closing costs and keep more money in your pocket at closing. This is known as a no cost refinance.
Just understand that it is you that is actually paying for this credit, and the closing costs aren’t avoided, they’re just paid for via a higher interest rate.
So it’s simply a trade-off of paying more over time as opposed to upfront, which can still be a beneficial strategy for some.
And consider the fact that it’s possible to shop around and find a low mortgage rate with a lender credit to boot.
11. Interest only
While it’s not super popular at the moment, a lot more lenders are offering an interest-only option again.
This makes the monthly payment lower, but in exchange for that benefit you might pay a slightly higher interest rate. You also don’t pay down your loan balance…
Again, lenders assume you’ll make fully-amortized payments, so anything else will likely come with a pricing hit, which could drive up your rate.
Let’s say you have some difficulty qualifying for a mortgage. A lender may hit you for the exception they have to make in order to get the loan to fund.
The same might be true if they have to do a manual underwrite (as opposed to automated) to approve the thing, or if your DTI is super high.
The best thing you can do is get pre-approved well before loan shopping to snuff out any red flags and address them before the underwriter does.
13. Reduced doc
While it’s largely a thing of the past, there are stated income products available today with non-QM lenders.
And because they’re relatively rare, you can expect the corresponding mortgage rate to be higher.
How much higher depends on other things such as credit score, LTV, and so on. If you have a combination of high-risk factors, expect a much higher rate than what you see advertised.
14. Program-related hit
Certain lenders will charge pricing adjustments for specific loan programs.
There could be a hit if it’s a USDA loan, or a hit at a certain LTV for an adjustable-rate mortgage.
Same goes for an FHA streamline or a VA IRRRL without an appraisal. Be sure to shop around to avoid these hits as not everyone charges them.
You may also get hit if the lender allows a recent short sale or foreclosure. In their eyes, you’re lucky to get financing, so expect a rate adjustment for the convenience.
15. Lender paid MI
If you don’t want to pay mortgage insurance out-of-pocket, or at least not explicitly so, you can opt for lender paid MI.
However, just because the lender pays it on your behalf doesn’t mean it’s free.
Instead, it increase your mortgage rate, which means the cost is spread out over the loan term.
So it’s still paid by you, just via the interest rate as opposed to upfront or separately each month along with your regular mortgage payment.
16. No impounds
If you decide you want to forgo an escrow account and manage the payments of property taxes and homeowners insurance on your own, your lender may charge you for the convenience.
Some folks get fired up at the notion of someone else holding onto their precious money, but it might be cheaper to just let them handle those payments.
Your better plan for the money might fall short of the interest rate savings on the mortgage. And you still earn interest on escrow accounts in many states.
17. You own a lot of properties
Back to that all important property tied to the mortgage. The subject property aside, if you own a bunch of other homes you might actually get hit with a pricing adjustment.
Again, risk is the name of the game here, and someone who owns a ton of mortgaged properties is seen as riskier than most, even if they’re seasoned investors.
So if you own more than 10 properties with a mortgage, it could cost you a bit more to obtain financing.
18. You live in a certain state
Even if your borrower profile is pristine and the property is as vanilla as they come, you could still wind up with a higher mortgage rate thanks to a state-based pricing adjustment.
Yes, some lenders may hit you just for living in a certain state, or for a certain combination like cash out in Texas.
If that’s the case, you may want to look at other lenders to see if you can find an even better rate without the very specific pricing adjustment.
19. High DTI
Assuming a lender will allow you to exceed certain debt-to-income ratio thresholds, there may be a hit for it.
It’s kind of ironic seeing that it could bump up your interest rate (and DTI) in the process.
This is something you can hopefully avoid by keeping outstanding credit obligations to a minimum…in other words, wait to swipe (or dip) those credit cards until the transaction is done!
The less other debt you have (like credit cards, auto loans, student loans, etc.), the more you’ll have available for your more important housing payment.
20. Subordinate financing
You can also get stung if you’ve got a second mortgage behind your first. Yes, this too has to do with increased risk.
The lender originating the first mortgage will be aware of the presence of a second mortgage, even if extended from a different bank or lender.
An additional home loan tied to the property can make it more difficult to pay the bills each month. As such, the rate on the first loan might be higher.
21. You didn’t shop
I know it’s like beating a dead horse, but it’s true. If you don’t shop around you might wind up with a higher mortgage rate.
Lenders (and mortgage brokers) can make varying commissions on your loan. Some charge more, some charge less for the exact same product.
You won’t know that if you only speak to one lender. And studies even prove you’ll save money if you obtain more than one quote.
Keep in mind that lenders may also charge higher rates for a combination of high-risk factors, such as high LTV coupled with an ARM. So the more stuff you’ve got going on, the higher the rate.
Conversely, if you present little risk to the bank you might actually qualify for a pricing special that can lower your mortgage rate.
At the end of the day, some of these pricing hits are avoidable and some are not, depending on your situation.
To ensure you land the best mortgage rate, limit the hits by crafting your loan accordingly and shop around to find a good match where your particular loan scenario isn’t unduly penalized.