6 things that drive up your mortgage costs

These factors can increase your rates and fees, but you can work to reduce them.

By MSN Real Estate partner Aug 13, 2014 9:38AM

© Stockbrokerxtra Images, PhotolibraryBy Scott Sheldon, Credit.com


Applying for a mortgage? Do your fees and rates appear to be a little higher than what you see advertised? If yes, there could be several key factors driving up the cost of your mortgage that you may not know about. These additional mortgage-pricing factors can make your mortgage cost more. Don't be fooled by a lower-priced mortgage offer if your financial picture contains any of these key cost drivers.


1. Credit score

Most lenders have a credit threshold of 740 or above. If the middle of the three credit scores the lender pulls is under 740 — even if it's 739 —  you could be paying slightly more in terms of interest rate, associated costs or both with your new mortgage application. If you attempt to raise your score by opening up new credit or paying off debts, it may or may not help you, depending on your credit history. Besides, opening new lines of credit too soon before you buy can be seen as a red flag by lenders, which can hurt your chances of getting a mortgage. Sometimes your best score is a byproduct of how you've managed your liabilities over time.


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2. Equity

This one is a biggie, particularly with conventional mortgages, loans not insured by the Federal Housing Administration, U.S. Department of Agriculture or U.S. Department of Veterans Affairs. The cream of the crop conventional loans can become very pricey if you have less than 25 percent equity and a low credit score, particularly if your score is under 700.

3. Occupancy

If you are financing a property that is not your primary residence, such as an income property/investment property, expect to pay more right out of the gate no matter what your loan-to-value or your credit score. It's not uncommon to see as much as 0.375 percent higher in rate for income property financing combined with these other risk factors.


4. Loan size

Let's say you have great credit — say 740 or above — and you take out a $160,000 loan on a primary home with 25 percent down. Believe it or not, a loan amount of $200,000 with the same factors will be more competitively priced. Contrary to popular belief, mortgage giants Fannie Mae and Freddie Mac have an appetite for bigger mortgages: usually at $170,000 or more: than they do for loans under $170,000. Therefore, Fannie and Freddie price these smaller loans slightly higher, as the interest they collect on monthly payments is below their margins.

5. Co-signer

Freddie Mac loans are the only loans on the conventional side (nongovernment) that allow for the use of a co-signer or even a non-occupying co-borrower to help offset a mortgage payment. Freddie Mac inherently prices its loans a bit higher than Fannie Mae loans, but offer this loophole.


6. Time-frame delays

An interest-rate lock extension, if not handled in a timely manner, can be a strong driver of cost. Interest-rate lock extension fees can be as high as .375 percent of the loan amount. For a $400,000 loan that's an additional $1,500 for an extra 30-day period of time, while you can expect half that amount for a shorter delay. Lock extensions typically can be for 15 days, or 30 days with most lenders. Want to avoid a time frame delay? If a lender requires a pay stub or a bank statement, get it to them quickly.


How to reduce your rates and fees

The following scenarios will always yield the best possible combination of rate and fees.

  • Middle FICO score: 740 or higher: Lenders consider this the ideal credit score range
  • Loan to value: 70 percent or lower: Equity, down payment or both at 30 percent yields substantially reduced pricing adjustments to rate and fees
  • Occupancy: Primary residence: Owner-occupied and second-home transactions are the lowest cost mortgage types available. A second home is also classified as a vacation home.
  • Loan amount: Up to $417,000: Using the traditional conforming loan limit at $417,000 in most geographic areas
  • Lock period: 30 days: Closing escrow within a month. Proactively providing to the lender any documents they may need during the process quickly will keep your rate and fees low.

A 15-day rate lock does have a lower price than a 30-day rate lock because of the time value of money. The longer the holding on that coupon, the more opportunity the market has to change, creating interest rate risk to the lender. By sharing some of that risk with the lender, a savvy consumer may be able to grind out a lower-priced loan.


Ideally, the two biggest factors to pay attention to in reducing your mortgage rates and fees is cash and credit. First, with managing your credit, a qualified mortgage professional with experience should be able to help you manage your liabilities in order to reduce your mortgage costs. Perhaps, it might mean paying off in full or paying down credit cards or even opening new credit. Also, it helps to get familiar with your credit far in advance of applying for a mortgage — six months or even longer — to give you enough time to address any potential problems. Start by checking your credit reports for any issues, as well as your credit scores. You can check your credit reports for free once a year.

Second, cash is still king. If you have an interest rate and loan program that is not necessarily ideal, getting a larger down payment together so you have an appropriate LTV can easily shave off thousands of dollars in unnecessary interest over the life of your loan.


Finally, a smart consumer should seek to work with an experienced mortgage professional who can proactively help them manage their credit and finances while ultimately reducing mortgage costs.


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Tags: loans
Aug 16, 2014 7:28AM
This is one of the very few mortgage articles I have ever read that is actually very accurate. I work in the industry.
Aug 16, 2014 2:31AM
Keep life simple and enjoy true freedom. Work like a dog, save, save, save, and then pay all cash for a modest home that you can afford.  Forget being held hostage to credit scores, mortgage payments, insurances, etc. 
Aug 15, 2014 8:06AM

While many of these factors may be true, they are not practical in the real world. Closing within 15 days and putting down 30% does not fit the average person's situation. Waiting to buy until credit scores are higher and what house  to buy are within the borrower's control.  Putting 30% down (that could wipe out the emergency fund) and a 15 day rate lock are very risky.

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