Last updated on March 28th, 2018
Wondering why you didn’t receive the low mortgage rate you saw advertised on TV? Well, there are a ton of reasons why the quote you obtained was higher. Let’s explore a lot of them.
1. Low credit score
This is a biggie. Most lenders assume (for the sake of their super low advertised rates) that you have stellar credit. So the fine print might say something to the effect of “minimum 740 FICO score.” That means your interest rate will be higher if you don’t have a score that high.
Fortunately, the fix is easy…work on your scores ahead of time to ensure they’re where they should be and you won’t suffer. You could even get a pricing break in the process if your scores are really good!
2. You don’t occupy the property
Mortgage lenders also tend to advertise rates on the basis that you’ll occupy the subject property. If it’s not going to be your primary residence, expect the mortgage rate to be significantly higher. Put simply, second homes and investment properties create more risk for lenders, and they must adjust rates higher to account for that.
Aside from a higher rate, you’ll also be more limited in terms of how much you can borrow. Sadly, there’s not much of way around this if you’re an honest borrower.
3. It’s a condo
Speaking of the property, you might be subject to a higher mortgage rate if it’s a condominium or townhouse. Again, these properties are riskier to lend on for a variety of reasons, and as such, you will pay more in most situations.
You might be able to avoid the condo hit if you keep your loan-to-value below a key threshold, such as 75%. Of course, not everyone has that type of money lying around.
Also note that lenders often hit borrowers if the property is a manufactured home.
4. You need a longer lock period
Another reason your mortgage rate may tick higher is if you lock in said rate for a long period of time. Perhaps you like mortgage rates where they are, but don’t plan to close for a couple months.
The benefit of that guaranteed low rate for a longer period may cost you…and it could turn out that rates move lower over that time, not higher. Of course, not everyone likes to take risks and you could still come out ahead if they rise.
5. The loan amount is big
Many banks advertise conforming mortgage rates. These are good up to $417,000. If your loan amount is higher than that, you could face a higher mortgage rate because your loan will be considered either high balance or jumbo.
If you’re close to this limit, you might be advised to lower your loan amount slightly to squeeze under the maximum and snag the corresponding lower interest rate. Interestingly, some lenders that specialize in jumbo loans may actually charge higher rates to those with smaller loan amounts.
6. The loan amount is small
Yes, it might sound crazy, but you can actually pay more for a smaller loan amount too. I’m talking much smaller than the conforming loan limit, say $150,000 or less. Or below $100,000. Of course, some lenders might be happy to take such a loan without an adjustment whatsoever. So find the right lender for your loan amount.
7. It’s not a purchase
While a purchase and a rate and term refinance are generally treated the same when it comes to mortgage rates, you’ll probably get stuck with a higher mortgage rate if you need to cash out.
Lenders charge a premium when you need to extract equity from the property, so expect a pricing hit for a cash out refinance. You can even get hit if it’s a rate and term refi. Additionally, understand that your LTV will likely be more limited when cashing out.
8. The LTV is high
Speaking of LTV, the higher your LTV, the higher your mortgage rate, all else being equal. Again, this has to do with risk, something all lenders are undoubtedly concerned about.
While it’s great to have low-down payment options such as the Home Possible Advantage that requires just 3% down, the mortgage rate will be higher compared to a loan with 10% or 20% down. Again, if you’re close to a certain threshold, you may want to do the math to see if bringing in more at closing money makes sense.
9. Multiple units
Another way your mortgage rate may get driven higher is if the property has multiple units. While you’re generally safe if it’s just two units, a 3- or 4-unit property could cost you. Combine it with non-owner occupied status and the interest rate can shoot much higher.
10. You took a lender credit
Not a fan of closing costs? Neither am I, but if you want a loan with low or no out-of-pocket costs, expect a higher mortgage rate in exchange.
Lenders are more than happy to provide you with a lender credit. Just understand that it is you that is paying for this credit, and the closing costs aren’t avoided, they’re just paid for via a higher interest rate. Still, it’s possible to shop around and find a low rate with a credit to boot.
11. Interest only
While it’s not super popular at the moment, a lot more lenders are offering an interest-only option again. This makes the monthly payment lower, but in exchange for that benefit you might pay a slightly higher interest rate.
Again, lenders assume you’ll make fully-amortized payments, so anything else will likely come with a pricing hit.
Let’s say you have some difficulty qualifying for a mortgage. A lender may hit you for the exception they have to make in order to get the loan to fund. The same might be true if they have to do a manual underwrite (as opposed to automated) to approve the thing.
The best thing you can do is get pre-approved well before loan shopping to snuff out any red flags and address them before the underwriter does.
13. Reduced doc
While it’s largely a thing of the past, there are stated income products available today. And because they’re relatively rare, you can expect the corresponding mortgage rate to be higher. How much higher depends on other things such as credit score, LTV, and so on.
14. Program-related hit
Certain lenders will charge pricing adjustments for specific loan programs. There could be a hit if it’s a USDA loan, or a hit at a certain LTV for an adjustable-rate mortgage. Same goes for an FHA streamline or a VA IRRRL without an appraisal. Be sure to shop around to avoid these hits as not everyone charges them.
You may also get hit if the lender allows a recent short sale or foreclosure. In their eyes, you’re lucky to get financing, so expect a rate adjustment for the convenience.
15. Lender paid MI
If you don’t want to pay mortgage insurance out-of-pocket, or at least not explicitly so, you can opt for lender paid MI. However, just because the lender pays it on your behalf doesn’t mean it’s free. Instead, it makes your mortgage rate increase. So it’s still paid by you, just via the interest rate as opposed to upfront or separate.
16. No impounds
If you decide you want to forego an escrow account and manage the payments of property taxes and homeowners insurance on your own, your lender may charge you for the convenience.
Some folks get fired up at the notion of someone else holding onto their money, but it might be cheaper to just let them handle those payments. Your better plan for the money might fall short of the interest rate savings on the mortgage.
17. You own a lot of properties
Back to that all important property tied to the mortgage. The subject property aside, if you own a bunch of other homes you might actually get hit with a pricing adjustment. Again, risk is the name of the game here, and someone who owns a ton of mortgaged properties is seen as riskier than most, even if they’re seasoned investors.
18. You live in a certain state
Even if your borrower profile is pristine and the property is as vanilla as they come, you could still wind up with a higher mortgage rate thanks to a state-based pricing adjustment. Yes, some lenders may hit you just for living in a certain state, or for a certain combination like cash out in Texas. If that’s the case, you may want to look at other lenders.
19. High DTI
Assuming a lender will allow you to exceed certain debt-to-income ratio thresholds, there may be a hit for it. It’s kind of ironic seeing that it could bump up your interest rate (and DTI) in the process. This is something you can hopefully avoid by keeping outstanding credit obligations to a minimum…in other words, wait to swipe (or dip) those credit cards until the transaction is done!
20. Subordinate financing
You can also get stung if you’ve got a second mortgage behind your first. Yes, this too has to do with risk. The lender originating the first mortgage knows the presence of a second mortgage, even if extended from a different lender, can make it more difficult to pay the bills each month. As such, the rate on the first might be higher.
21. You didn’t shop
I know it’s like beating a dead horse, but it’s true. If you don’t shop around you might wind up with a higher mortgage rate. Lenders (and brokers) can make varying amounts on your loan. Some charge more, some charge less. You won’t know that if you only speak to one lender.
Keep in mind that lenders may also charge higher rates for a combination of high-risk factors, such as high LTV coupled with an ARM. So the more stuff you’ve got going on, the higher the rate.
Conversely, if you present little risk to the bank you might actually qualify for a pricing special that can lower your effective mortgage rate.
At the end of the day, some of these pricing hits are avoidable and some are not, depending on your situation. To ensure you land the best rate, limit the hits by crafting your loan accordingly and shop around to find a good match where your particular loan isn’t penalized.