Untangling Mortgage Rates: Credit, Down Payments, and Why 19% Beats 20%

We break down why rates dipped despite Government shutdown and show how your personal profile, not the headline number, decides your mortgage pricing. Credit tiers, down payment strategy, occupancy, term, and loan size all interact—and you can use them to your advantage.

Another MUST LISTEN to episode!!

You can find Nikki on TikTok, Instagram, and Facebook at mortgagesfrommntoaz and Email Angie at Angiegerber@gmail.com or comment where you’re listening and we’ll reply.

Chapters

• 1:12 Holiday Market Check & Rate Shift
• 1:28 How Shutdowns Impact Bonds & Rates
• 2:33 Rate Levels: High Fives to Sixes
• 3:54 What Determines Your Interest Rate
• 5:39 Credit Score Tiers and Loan Types
• 8:22 The 19% vs 20% Down Surprise
• 11:31 Terms, Occupancy, and Custom Durations
• 14:08 Conforming vs Jumbo vs Small Loans

Transcript

SPEAKER_00: 0:37

Welcome to the Monday market update. It is October 13th. And Nikki, I'm excited to get back to it. How are you? I'm doing good.

SPEAKER_01: 0:46

I'm doing good. It is Columbus Day today. So the market is actually not open today. So we'll talk a little bit about Friday and how things looked last week. So with the government shutdown, the bond market actually really likes government shutdowns from that standpoint as far as mortgage interest rate goes. What I mean by that is when the government shuts down the bonds, the bond rate actually lowers because of the uncertainty and the volatility in the market. So what we've kind of seen is actually an improvement on mortgage interest rates from where they were the week before. So we were kind of like we had a really good point in time where we were in the high fives to low sixes, crept back up into that mid six range. And now we're kind of creeping back down into that lower six range. So it's been a little bit of volatility with the shutdown, a little bit of things going up, down and sideways, but for the most part, we're kind of keeping down below, definitely down below the 7% mark, really six and a half and below is really where we're sitting right now. So that's really good. Um, and when I say that, I mean conventional purchase interest rates. So which actually leads me into what I want to talk about today. So I get this question a lot. What are the factors that determine the interest rate for my particular loan? So there's a lot of different factors that can determine the interest rate. First and foremost is credit score. So for every 20 points, so in other words, 680, 700, 720, 740, and 760 and above, your interest rate on your mortgage can change based on those 20-point increments. So if you have a 619, you're gonna get a different interest rate than a 620. If you have a 719, you're gonna get a different interest rate than a 720. So that's kind of how the interest rates are set up as far as 20-point increments and telling us that the higher your credit score, the lower your interest rate. But that obviously isn't always the only factor. The other thing that we have to talk about is loan type. So if you are doing an FHA loan, a VA loan, a conventional loan, jumbo, things of that nature, depending on what type of loan you're doing, that will help, that will determine your interest rate as well. FHA does have lower interest rates than a conventional loan. However, with that being said, they do have upfront fees and higher mortgage insurance, which offsets the benefit of that lower interest rate when compared to conventional. Now, this isn't always the case, but for the most part, as a general observation, we can say that FHA has lower interest rate than conventional loans. However, like I said, that's not always the whole picture. Conventional options have lower mortgage insurance, no upfront fees, which and you can get rid of your mortgage insurance on the loan, which makes them a little bit more of an ideal loan for most people. With that being said, VA loans have lower interest rates than FHA and conventional loans. So those ones, the VA loan, the VA loan rates tend to be lower and they aren't as affected by credit score as other loan types. So for a VA loan, you could get the same interest rate at 700 versus 740 credit score. So those are just some interesting things to note as well. The other factor is down payment. This is an interesting one. Most people think that the more money you put down, the better your interest rate is. That's not necessarily true. And here is why. If you have a client with a 700 credit score that's putting 20% down on a home, their interest rate is actually going to be higher than a borrower with a 700 score putting 19% or lower down. And here's why. 20% down means you don't have mortgage insurance. Therefore, the investors will increase the interest rate slightly, so about an eighth of a percent, in order to make up for that fact that you don't have mortgage insurance. If you were to put anything less than 20% down, they actually lower that interest rate because that mortgage insurance is going to be tacked on top of it. So technically speaking, what they're saying is based on all the algorithm and all the data that they've ran, someone putting 20% down is slightly higher risk than someone putting less than 20% down with mortgage insurance. So it's a really interesting thing that happens. If you go from 20% to 25% and then to 30%, so in 5% increments all the way up to 40% down, you will get an interest rate break for each 5% over 20%. Does that make sense?

SPEAKER_00: 5:05

Yeah, a lot.

SPEAKER_01: 5:05

It's a lot. Okay. Yes. So you can even have a borrower who's putting 5% down, 700 credit score, and their interest rate is going to be better than somebody putting 20% down at that same credit score. Yeah. For the same loan if all the other factors are the same. Isn't that interesting? It is. Yes. Yes. So yeah. And on FHA, the amount you put down doesn't matter. That interest rate is the interest rate, is the interest rate based on more on your credit score than anything. So that's interesting for FHA. The mortgage insurance changes slightly, but with that being said, it doesn't, you know, the interest rate is the interest rate. It doesn't really change all that much with down payment. It changes mostly with credit score. The other thing that we have to talk about is occupancy type. Primary residence, second home, investment property. However, we type that home is going to help determine interest rate. Again, investment properties in second homes have higher interest rates than primary residences. So we just got to make sure that we're watching on that. The other thing is loan term, 30 years, 20 years, 15 years, 25 years, however long that loan term is, that's going to affect your interest rate as well. General rule of thumb, lower terms, lower interest rate. So 30 year fixed is going to be a higher interest rate than a 20-year. It's going to be a higher interest rate than a 15 year, it's going to be a higher interest rate than a 10-year. Ironically speaking, you can do a mortgage for five years, or you can do any increment of time that you choose up to 30 years. So if you wanted to do a loan for 18 and a half years, you absolutely can. You get to determine how long you want that term for. So it could be, you know, 300 months, or it could be 241 months, whatever you want to do. The interest rate is determined 30, 25, 20, 15, and 10. However, you can pick any of those varied terms that you want in on your mortgage. How often do you see that? I mean, I see it actually sometimes. There's two instances when I see it. One is when a person has a really determined amount they want to pay for their mortgage each month and they want it to be set at that amount and they want to make sure that it's paid off in a certain amount of time. I'll see it when that happens. I'll also see it when people go to refinance and they don't want to start their 30-year term over again. So they say, wait, I only have you know 300 months left. Let's just set the loan up for another three, you know, for the remaining amount of time. So those are the two instances where I'll see it. Other, the only other instance where I've ever seen it is when someone has like an attachment to numbers or believes that numbers mean something, you know, more to them. So they will say, I want a loan for this amount of term because this is the numbers that I need to have, you know, for the karma or whatever their their belief system is. So I see it that way too. So yeah, so a couple of people will decide, I don't really want 30 years. So no, yeah. I don't like that number. Exactly. Exactly. So yeah. The other thing that will help will determine your interest rate will be loan amount. So there's a couple things that there's a couple ways that this is determined. So if you go above what's called the conforming loan limit, so in other words, right now it's 806,500. If you have a loan amount that's over 806,500, you go into the jumbo market where your interest rate is going to vary based on whether you're picking a fixed and ARM product, you know, things of that nature. Those jumbo interest rates are based on totally different market conditions than the regular conventional mortgage interest rates. They are based on the bond. Well, they are slightly, they aren't tied exactly to the bond, but they're they're more based on the actual investor. So like Chase Bank or like Wells Fargo or whomever the investor is, they'll determine the jumbo mortgage interest rate based on holding that money in-house. So that's a big difference between that and the conventional side, which is all Fanny Freddy, sell off to servicers, things of that nature. So depending on the lender, your jumbo interest rate could be higher or lower, depending on determining market conditions and where that bank particularly sits and how they want to handle their investment products. So that's kind of interesting. On the other side, if you have a loan amount that is under 200,000 or most of the time under 150,000, that will actually have a drastically lower interest rate than a loan that is in that conventional realm. The reason for that is I should say that's also tied to you have to qualify income-wise, but there is a special subsidy that is out there for loan amounts that are under 200,000, sometimes under 150,000, that's a special loan subsidy for people who qualify for that mortgaged amount, plus make less than a certain percentage of the area median income. So if you're under 80% of the area median income and you're under a loan amount of 200,000, that's one subsidy break that you get from an interest rate standpoint. The other one is if you are$150,000 loan amount and make less than 50% of the area median income, you get an even larger break on your interest rate. So I actually just quoted somebody last week. This is what kind of got me thinking about it because she was asking me all these questions about what goes into the interest rate. She actually is her loan amount is$150. She's keeping her loan amount at$150 because she makes less than 50% of the area mean income. I was able to quote her at 5.5% last week, which I was quoting everyone else at 6.375. So yeah, it's a huge difference. Huge difference for her. Yeah, because of where she's moving and what her income level is. So yeah, you can get some breaks on interest rate. But as you can see, overall, the big picture is there's so many factors that go into an interest rate for a particular client. And depending on how we want to strategize through it, that the only thing I will stress enough is do not pay attention to online interest rates. They mean nothing. It's really the big message here. There are so many factors, as I just explained, that go into you know pricing your loan and your particular interest rate and exactly what the market's doing, et cetera. There's so many things that go into determine it that anything that you see online is very much targeted towards a very specific client that may or may not ever actually qualify somebody. So it's really interesting. I even get, you know, I'll get texts sometimes from clients saying, hey, I received this in the mail, they're offering a 4.99% interest rate. And then you look at the details and you're like, except they're not. So there's that. There's that, you know, it's like, you know, they don't the app the marketing is the marketing is the marketing. So, in other words, the big message here is don't pay attention to online interest rates. Make sure you're talking to a lender about what factors contribute to your interest rate on your mortgage, and then also make sure that your client is strategizing with their mortgage lender on how they can change things or how they can improve their interest rate by making certain tweaks to their loan. A good example of this is sometimes I will have clients elect to put 19% down instead of 20% down, and they'll ride that. And then right after closing, they'll pay the additional to take care of the mortgage insurance. That's an interest rate difference. They don't they aren't required to pay any months of mortgage insurance. They can literally the next day call when they're so call their servicer, pay that mortgage down to the 20% mark and never have to pay a dime of mortgage insurance, but they got the benefit of the lower interest rate.

SPEAKER_00: 12:26

Yeah, that's why they need people need you. Yeah, honestly, there's so many facets to this, and it's a moving target, so they're always changing, and just like the 150, you know, less than, and I love that they have those perimeters so not anyone and everyone can use it. Yeah, but you need you need to know that that exists. And again, it's really about I I talk about all the time staying in your lane and being really, really good at what you do, and having people that are in their lane, such as yourself, at such a high level, yeah, and just building this business with people that you can trust and that show up at such a high level. And it's you know, as I talk to agents, it's not as easy as you would think. I've just always had amazing and amazing vendors and business partners that are an extension of my business, but that's not always the case. So uh yeah, I really appreciate you and and all the knowledge and experience you bring.

SPEAKER_01: 13:26

Yeah, thank you. I appreciate that.

SPEAKER_00: 13:27

Yeah, it's good to work with good people.

SPEAKER_01: 13:29

So on both sides, you know, like there's realtors that I absolutely love working with, and then there's some that I don't prefer, just in the same sense of vendors. You know, you got to find the right team and you got to find people that you can surround yourself with that are gonna help, you know, your businesses succeed for sure.

SPEAKER_00: 13:44

Absolutely. Well, wonderful. And I guess that's a great, great note to kind of end on and talk about it. Is I always say who you partner with matters, these people that you're referring to, your lenders, your title, inspectors, contractors, they are like another arm, a direct, direct reflection and extension of your business. So if something happens, again, we're the quarterback, we're we're the leader, and it comes back to us as uh they say the book stops here. Yeah, so it is truly important to know and have great people. And if you don't have all the vendors lined up or great people that you know of, uh reach out to Nikki or I. Nikki is licensed in many, many states. I have business partners in just about every state as well. So between the two of us, we should be able to get you covered and help you find some really phenomenal people that will only level up your business and again get you back to your lane, focusing on where you should be focusing because you're not running around worrying about everyone else doing their jobs. I could not imagine running a business that way. No, oh, it sounds exhausting. Well, wonderful, Nikki. Thank you so much. I'm so glad that we jumped on today. And uh yeah, in the meantime, where do they find you?

SPEAKER_01: 15:02

Um, you can find me on TikTok, on Instagram, and on Facebook at mortgage from mn to z.

SPEAKER_00: 15:09

Perfect. And my, you know, I'm Angie Gerber at gmail.com. You can send me an email or respond below, whether you're on the podcast, watching on social media or YouTube, leave a comment and Nikki and I will check those and get back to you as soon as we can. Wonderful. All right, we'll see you next Monday. Have a good one. Bye, everyone. Bye.