How Lenders Price Mortgages

Have you ever wondered why your friend got a better deal on a mortgage than you did? It may come down to mortgage pricing. Lenders price their mortgages based on several factors, including whether it’s a purchase, renewal, or refinance, and whether it’s an owner-occupied or rental property.

Let’s take a closer look at the various factors lenders use when pricing mortgages.

1. Purchase vs. Renewal vs. Refinance

Generally speaking, you’ll get the best mortgage rate when you’re initially buying a home. That’s because the lender wants to win you over as a client. At first, glance that may not make sense. You’d think for being a loyal client, your lender would offer you its best rate upon renewal, but that’s often not the case. That’s why it’s so important to work with an expert that helps you find the best rate upon renewal. 

If you’re refinancing your mortgage, typically, you’ll pay a higher rate than purchases and renewals. Again, be sure to get in contact with a Mortgage Professional to make sure you’re getting a good deal.

2. Owner Occupied vs. Rental Property

If you’re buying a home to be your primary residence, it almost always has a lower mortgage rate than buying a rental property.

Owner occupied mortgage rates tend to be lower because there’s less risk for the lender. Think about it this way: if you owned a primary resident and rental property and you ran into financial difficulty, which one do you think you would stop paying first? For almost all of us, it would be a rental property, and that’s why it comes with a higher rate.

3. Insured vs. Insurable vs. Uninsurable

There are three main types of mortgages: insured, insurable, and uninsurable.

When you buy a property with less than 20% down, it’s considered an insured purchase, and you’re required to get mortgage default insurance. Default insurance protects the lender in case you’re unable to pay your mortgage. Since the lender pretty much has zero risk, it can offer you its very best mortgage rates.

The Next one is insurable. An insurable mortgage is a property you’re putting at least 20% down with an amortization period of 25 years or less and a purchase price of under $1 million. You can expect to pay a slightly higher mortgage rate than an insured mortgage.

The last type is uninsurable mortgages. A 30-year amortization, purchase price of $1 million, and over and refinances are all considered uninsurable. Uninsurable mortgages tend to come with the highest mortgage rates of all.

4. Your Credit

If you have a credit score of at least 680, you should have no problem qualifying for a lender’s best mortgage rates. However, if your credit score is below 680, that’s when you can run into difficulties. You might have no choice but to go with an alternative lenders who can get the job done. Due to the added level of risk, expect to pay higher mortgage rates.

5. Fixed vs. Variable

Variable-rate mortgages almost always come with the lowest mortgage rates. However, there’s a risk: mortgage rates could go up during the term of your mortgage. If you want your mortgage rate to stay the same, you’ll want a fixed-rate mortgage. Fixed-rate mortgages usually come with a higher rate than variable because you’re paying for the added insurance of your mortgage rate remaining the same for the term.

6. Term Length

Usually, the longer the mortgage term, the higher the mortgage rate; however, keep in mind that if you opt for a shorter-term mortgage, you run the risk of paying a higher rate upon renewal. Also, you’ll have to renew your mortgage more often instead of once every five years.

7. Loan-to-Value

Loan-to-value refers to the size of your mortgage relative to your property’s value.

For example, if your home is worth $500,000 and you have a mortgage for $350,000, your loan-to-value would be 70 percent ($350,000 / $500,000 = 70%).

Generally speaking, if you have a loan-to-value under 65% and an insurable mortgage, you’ll qualify for a lender’s best mortgage rates.

The Bottom Line

There you have it; these are the main factors lenders use when pricing mortgages. Next time you are shopping for a Mortgage, consider these points and let an expert help you to get the best rate possible.

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