On any given day my phone will ring several times with buyers who simply call to ask what the current rate is. Meet the 'rate shoppers.' This is a group of would be clients, most of whom are well meaning enough. In fact, they are probably more educated than the average consumer. In some cases however, they possess a heightened sense of paranoia of getting involved in a mortgage transaction which might end sourly and some are only concerned with getting the best/lowest interest rate.

I always, always, always try to engage these clients in further conversation. Sure, I want their business but it's more than that. I know that if they think that simply asking for the current rate is enough- they need more information. And, I need it too- that is, if they want an accurate rate quote!

There is just so much that goes into quoting a mortgage interest rate. Some of the questions that it is helpful to have answers to prior to quoting a rate are the following:

1. Will the home financing that you are seeking be for a purchase or a refinance? Although most people think this wouldn't make much of a difference- it could. With a refinance transaction, it may cost a home buyer less to put more money towards closing costs up front resulting in a lower interest rate over the life of the loan. Even if this extra money up front- paid in the form of points, etc. is 'rolled' into the refinance to allow the client to spend very little out of pocket cash at closing- it will still result in money saved to the borrower.

2. If this is a purchase transaction- will this be your primary residence or will it be an investment property? In the mortgage industry- everything, emphasize absolutely everything, revolves around the concept of risk. Lenders want to know that a borrower is able and willing to make their mortgage payment when it is due. The commonly accepted assumption among most lenders is that if a home owner falls on difficult times, they are more likely to pay for the roof over their own head than that of their tenants. For this added layer of riskiness, folks who decide to move forward with the purchase of an investment property are generally looking at a higher down payment (10-20% for a 1-2 unit property- sometimes higher for a three or four unit property) and a bit of a higher interest rate as well.

3. Will this be a first time home purchase? In addition to quoting a rate, I often like to know if my buyers will be first time home buyers. Some of the best rates and terms on the market are available to first time home buyers. In addition, if this would be first time home owner expresses that he/she does not have a lot of money to use toward down payment and closing costs- I like to mention that there are programs available that will help assist with this need. There is a program in Luzerne County (The Luzerne County Growing Home Owner's Initiative) that I tell buyers is the closest thing to free money they will find. Of course, buyers need to meet the criteria- but if this could help get a first time buyer into a new home- I believe it's a great idea and useful information.

4. Do you have any idea what your current credit looks like? This can be a tough question as a majority of people that I deal with on a day to day basis do not have any idea what their credit looks like. Credit score will not only be a large determinant in interest rate but also in monthly payment. Potential home buyers with lower credit scores will undoubtedly be looking at higher interest rates than their more credit worthy counterparts- but the problem for these buyers can become two fold. In addition to a higher interest rate they may also face a higher monthly mortgage payment resulting from a higher rate of private mortgage insurance. Going back to the concept of risk- less credit worthy buyers will have a much higher private mortgage insurance component as part of their monthly payment. This could add as much (or more!) than a hundred dollars a month to your buyer's monthly payment- depending on loan amount.

5. What amout of money were you hoping to use toward down payment? If it is not 20% , were you hoping to be placed into a home financing product in which you could avoid having to pay private mortgage insurance? Options do exist so that would be home buyers can structure their home financing so that they do not need to pay private mortgage insurance.

How does this affect the rate? It can affect the rate in one of two ways. If a buyer has 20% or more to put down on a property they will not need to pay private mortgage insurance at all. If their down payment is less that 20% they can choose to go with a loan product that is becoming extremely more popular- lender paid mortgage insurance. (LPMI.) This will result in a small hit to interest rate. (This is simply an example- say, for instance, if current market rates are at 7.% your buyer may be quoted an interest rate of 7.25% for lender paid mortgage insurance. So, for this small hit to rate your buyer can put less than 20% down and still not look at including a high private mortgage insurance quote in their monthly payment.)

A second way that a buyer could look at avoiding private mortgage insurance would be to structure their home financing as two separate loans. (This option is good if you have a buyer looking for 100% financing.) Although these particular types of loans are fewer and further between as a result of tightening standards- loans structured as 80/20s and loans structured as 75/25s still do exist. In both of these options, the second smaller loan acts as the down payment on the first loan. In both cases, the rate on the first larger loan is typically at or just above current market interest rates while the second smaller loan could carry a much higher rate. This type of loan works especially well in cases where a buyer knows that they will be coming into a sum of money where they will be able to pay that smaller loan off first to avoid getting hit with all of the exra interest that this type of loan will accumulate. A good example would be someone who currently has a home to sell.

The questions above are just a few of the questions that I ask a 'rate shopper' when they call and refuse to give any information other than the fact that they want to know what the current rate is.

Rate shopping is definitely not a bad thing- but informed consumers need to know that asking about rate is just the first question in any mortgage transaction! The question about rate should immediately be followed by further questions (and answers given to the loan officer whom the information is being requested from!)

Remember to tell your home buyers that while rate is important- it's not the only thing! Let's help get more educated buyers out there!

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