Understanding How Lenders Price Mortgage Rates
In this blog, we will cover and discuss understanding how lenders price mortgage rates for borrowers with bad credit and low credit scores. Mortgage rates are the determinant that determines your monthly mortgage payment over the term of your mortgage loan. The higher the mortgage rates are, the higher the mortgage payment will be and the more interest borrowers will pay over the term of the loan. Many home buyers shop for mortgage rates, which is highly advised.
Do Lenders Charge Different Mortgage Rates?
There are instances where no matter how much they shop for mortgage rates, some home buyers may be quoted higher mortgage rates due to lower credit scores. The lower the credit scores are, the higher rates will be. Lenders view borrowers with low credit scores as high risk.
With high-risk borrowers, lenders charge a higher mortgage rate. This is due to the higher chances of a default ratio. In this article, we will cover and discuss understanding how lenders price mortgage rates for borrowers with bad credit and low credit scores.
Understanding How Lenders Price Mortgage Rates For Borrowers
On every home loan transaction, whether it is a home purchase or refinance, there are closing costs. Lenders will offer the option of getting lender credit to cover part or all of the closing costs. This is commonly referred to as lender credit. However, there is a cost involved with lender credit. In lieu of a higher interest rate, the lender can give the borrower a lender credit towards closing costs on their purchase or refinance mortgage loan.
Case Scenario How Lenders Price Mortgage Rates
For example, say a loan applicant gets quoted a par mortgage rate of 4.0% interest rate with zero lender credit:
- These numbers I use are just hypothetical numbers for case scenario purposes
- Let’s assume closing costs are $5,000
- We will assume the lender will give this borrower a lender’s credit of $2,000 for every 0.125% increase in rates
- So if the borrower chooses a $2,000 lender credit, he can choose a 4.125% mortgage rate
- If he chooses a $4,000 lender credit, he can then choose a 4.25%
How Lenders Price Mortgage Rates With Discount Points
Borrowers who plan on keeping their homes for a long time and not planning on refinancing in the near future can get lower mortgage rates by paying discount points. For example, here is a case scenario:
- if the given par rate is 4.0%
- the lender can offer a lower rate than the 4.0% mortgage rate
- this is done by paying discount points
- the lender may offer a 3.75% mortgage rate if the borrower pays a 1% buy down in points
- 1% is based on the amount of the loan balance
- the borrower can use a sellers concession credit to buy discount points to buy down mortgage rates
Alex Carlucci, a senior loan officer at Non-QM Mortgage Brokers explains how lenders price mortgage rates with discount points as follows:
How Lenders Price Mortgage Rates With Lender Paid Mortgage Insurance
Mortgage borrowers who are applying for a conventional loan and have less than 20% equity and/or down payment, require private mortgage insurance. PMI is required on conforming loans until they reach an 80% loan to value. Lender-paid mortgage insurance, also referred to as LPMI, is an option most conventional lenders offer higher credit score borrowers. This is where the borrower does not have to pay private mortgage insurance in lieu of a higher mortgage rate.
What Is The Benefit of Lender Paid Mortgage Insurance
Sometimes getting a conventional loan with lender-paid mortgage insurance may be a better loan program. This is even though it has a higher mortgage rate. This is because the monthly payments are lower.
