Mortgage rate too high?

Question

I'm looking to buy my first rental property and I just got pre approved for a conventional loan for 100,000$ through a recommended broker in the area. Everywhere I look online I see interest rates ranging from 3% to 5% but my broker sent me an approval for a loan with 6% interest. I have good credit (700+) and no derogatory marks on my credit report. Should I be okay with a 6% interest rate or should I go back to my broker and tell him to keep looking? I've run the numbers on a deal with the different rates and it could be almost 100$ difference if I had a rate around 3-4. Let me know what you think.

D'Andre B. · Answer

I just locked in a rate of 4.375% for a 4 - unit investment property with a credit union located in Cincinnati. It's a 30 year fixed Conventional loan and will require a 25% down payment and the loan is 106k. The credit union will also sell the loan to Fannie. i also paid .75 of a point (total apprx $800)

Josue Vargas · Answer

1. Look at least for three quotes, unless you know your Money broker or lender, which seems you don't have one.  Establish a business relationships with some brokers you use or will use.  They are a crucial part of our business.

2. Understand the type of Loan or Mortgages you are getting into it.  There are many different loans for REI.

3. Credit Score is not always the best measure for best rates.  Things like Income to Debt Ratio, recent previous large loans, large recurring debts, etc. plays a big factor.

4. Interest rates are great right now, lenders are offering as low as 3.5% in some instances.

5. Make sure they are professionals.  Nor the less, unfortunately some people are not honest.

Daniel Hennek · Answer

Not that many factors on an agency loan.  Here are the factors besides the market in general:

1: Credit Score - helps to determine LLPAs

2: Loan to Value Ratio - helps to determine LLPAs

3: Product Type 15 vs 20 vs 30 year fixed or ARMs - obviously most people understand why these things change rates

4: The loan originators margin or selected compensation plan

5: Property type, investment, primary or secondary residence

6: Cash out or rate/term

I say this because it has to do with what you're saying Corby but takes it a step further.  I agree with you on several points. First that consumers should shop around almost always.  A lender will often times make or break a deal and I agree on your opinion about mortgages not being commodities like the big lenders keep telling people and that's why I reference point 4.  The comp plan selected by a loan originator will determine the rates they can sell just as much as any LLPAs applied for LTV/credit.

MLOs have to hit a certain margin, based on their comp plan, to sell a loan. So, one loan originator might have to hit a higher margin and therefore sell a higher rate, higher fees or combination of both.  So, even inside of the same mortgage company you can get different rates quoted by different MLOs.  Companies usually have technology and processes in place to prevent a consumer shopping their mortgage rate inside the same company with a different MLO but I've seen it happen and it's funny not funny.

Daniel Hennek · Answer

Just some points to add.

The rate is not always the most important thing to consider.  If you're holding it for a long time then yes it's a key variable but always consider what you're doing with the property and future intentions.  A short term rent and flip or fix and flip has different considerations.

Paying points is usually not a good investment.  Most people don't stay in the same loan longer than 7 years for a variety of reasons.

I've originated several hundred mortgages and very few of them are with discount points because it just doesn't make sense.  My counsel to clients on this issue goes something like this:

You might not be sure what you're doing with the property in 5 years or 10 years.  Why invest in a rate that you won't see a return on for over 8 years?  Let's look at the example just given to see how it plays out with the numbers:

A loan of $106,000 at 4.375% is a payment of $529.24 and at 4.5% its $537.09; almost $8 so lets call it $8.

If it costs .75 points to get the rate of 4.375 and 4.5 is 0 points then you're paying $795 extra.  How long does that take to get back by saving $8 each month.  Answer about 100 months, or 8 years and 4 months.j

So, your analysis comes down to how likely you think it is for you to keep that loan for over 8 years 4 months.  Say you keep that loan for 10 years which is 1 year and 8 months longer than the break even point on the rate decision.  So another 20 payments you saved only $160 in ten years for spending $795 upfront.  You spend $795 upfront and over 10 years you save $955 on that rate decision of 4.375% vs 4.5%.

If you keep the loan for only 7 years you lose money on that rate decision.

It's not a ton of money, but usually the extra investment is a long term gamble that very rarely ever pays off, at least according to industry statistics.  Explained to most people in this way they choose to go with a 0 point rate, or even a rate with a lender credit for the same mathematical reasons.

A good MLO can do the math for you and give you the breakdown.

Key note*** the difference in 1/8th of a point in interest is not always as large as .75 points, but it certainly can be.  There is usually a "sweet spot" in pricing where if you do the math on a rate above or below you can do the same analysis mentioned above and see what makes sense and what time frames come out with regards to break even points.

I'm typing fast sorry for any typos or things that aren't quite clear.

Corby Goade · Answer

"Good" rates are relative, there are many factors that influence your rate. I'd talk to you broker and ask what factors influence the quote you got. There's no harm in shopping around- so many consumers, especially new investors, view mortgages as a commodity; nothing could be further from the truth. A good lender will make or break a deal, I've seen it many times. Maybe the communication, service and urgency from one lender is worth an extra point- you can always refi down the road if need be, but if your discount lender can't close the deal, you'll never get the chance.

Henry Lazerow · Answer

I have lots of clients getting quotes so see many in last few weeks. Current rates owner occupant 25 down are in high 3s. With low down programs when count pmi it's in low to mid 4s. Non owner occupant is from 4.5-5.2 quotes.

Call Wells Fargo they tend to be the one buying these low rate mortgages from various brokers. They lend in all states so you could even call a Chicago one and have them do your loan. These are all Chicago rates.

Daniel Hennek · Answer

Couple comments about the last few posts.

On any agency loan (fannie/freddie) your credit score is absolutely the biggest determining factor. On some non-QM products they will have all sorts of features affecting rate.  For agency though you don't get pricing adjustments for DTI, or the fact that you recently had a large loan.  Any recent loan you have will reflect in your credit score and it is factored in right there by the score.  DTI(debt to income ratio) can help get you an "approve" finding but it doesn't change pricing.  LTV and credit score are the big movers on rates and pricing for agency loans.  So, as I mentioned up above it depends on what type of loan we are talking about here, is it a Qualified Mortgage that will be backed by either Fannie Mae or Freddie Mac? Or is it a non-Qualified Mortgage?

Also, DO NOT CALL Wells Fargo!  So many reasons why not but mostly because they are going to charge you a higher rate than most other lenders unless you're just comparing the biggest lenders in the nation which is silly and expensive.  Lenders like Wells Fargo and Chase are almost always around .375% to .5% higher in their retail channel than what a good lender can get a client in the same situation at the same pricing.

Sometimes you do have to look around because brokers or lenders just don't have access to the product that fits you best.  Evaluating a lender and their products is a very time consuming task for a mortgage broker and some just don't take the time monthly to evaluate their portfolio and try to improve it.

Find out if you're getting quoted QM or non-QM.  If It's QM the rate should be lower; the rates referred to here by others are QM rates. I suspect it's non-QM based on the rate quoted so in that case you should find out why he/she didn't quote you a rate from a QM and what factors they are relying on to determine that you don't qualify for a QM if that is indeed the case.

Chris Mason · Answer

I'm thinking OP's lender has a "small loan amount" adjustment at play.

Cassi Justiz · Answer

@Jonathan Lubenko You definitely need to shop rates with other lenders.

I had a similar experience happen with a local broker and some of my investors. He quoted them 6% and had fees in order for them to even get that rate. I had them shop around to one of my other local lenders and they were able to secure a 4.99 with no points but ended up paying one point to get a 4.2% rate. We just closed on their property on Friday, so these rates should be pretty current.

When I questioned the broker about why his rates were so much higher he said that they could technically get my clients lower rates, but the lower rate lender he works with was taking over 8 weeks to process new loans so he was keeping everyone on the more expensive but faster lender to keep the deals moving.

Daniel Hennek · Answer

It all depends on the product you are looking at.

prime loans are much lower than 6% right now.  Are you getting a Qualified Mortgage? Or are you being quoted a non-prime/non-Qualified Mortgage?  Sounds like you're getting quoted a non-QM so ask why that is the case.

Most brokers would quote you the best they can do and that would be a Qualified Mortgage/prime loan if they could get you into that.  You should inquire about the loan a little and ask the broker why it's so high when you're seeing lower rates around.

Also, it's unlikely but possible that he/she approved you based on 6% and that's not the actual rate they are quoting.  Just call them.

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