A Higher Bar For Those Low Mortgage Rates

By Jane Bryant Quinn
Sunday, March 15, 2009

So who's actually getting some?

I mean those beautiful fixed-rate mortgages advertised at 5.5 percent or less. Maybe, in a virtual world, an avatar can drop into a virtual bank and close a loan at that rate, but here in real life, achieving it is close to a miracle.

You might get 5.5 percent if you put down 20 percent, borrow $417,000 or less, boast a high credit score (730 to 750, out of 850 total, as determined by your credit history), carry low debt relative to your reliable income (confirmed by two years' worth of tax returns and probably not counting bonuses), buy in an area where home prices are relatively stable (wherever that is) and use a community bank, not a national bank.

If you slip even a little bit on any of the criteria above, you will be charged a higher interest rate and higher fees, as well. Mortgages are far more expensive than they appear, especially for people borrowing large amounts or trying to refinance.

To start with, none of the easy, bubble mortgages are around anymore. No "stated income" loans where you don't have to document your earnings. No option adjustable-rate mortgages, where you could choose to pay less than the interest due. Virtually no piggyback loans, where the lender supplies a first and second mortgage in the same package, up to 100 percent of the purchase price. You might still get an interest-only loan, but it's not cheap.

The principal actors in the market today are the nationalized housing-finance companies, Fannie Mae and Freddie Mac, which purchase mortgage loans. In third place stands the Federal Housing Administration, which insures loans originated by private lenders. All together, the government sector accounts for 87 percent of the mortgages currently being made, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance Publications in Bethesda. Purely private financing is expensive and scarce.

The government backs only loans of a certain size, known as conforming loans. The lowest available interest rate is generally on a traditional Fannie Mae or Freddie Mac mortgage for as much as $417,000, with a higher limit in Alaska, Hawaii, Guam and the U.S. Virgin Islands. The next step up would be a jumbo conforming loan of as much as $729,750, available in the most expensive counties in the United States and costing anywhere from a quarter-point to a full percentage point more.

And that's just for starters. Fannie Mae and Freddie Mac add a quarter-point "adverse market delivery charge" because of declining home prices. They have also initiated "risk-based pricing," which raises fees on people with less than a perfect borrowing profile. You will pay more if your credit score falls below about 720, you are buying a condominium or you are putting less down than 15 percent.

"You might qualify for a mortgage, technically, but the interest rate and fees may make it prohibitive to take," Cecala says. Loans larger than Fannie Mae and Freddie Mac's limits, booked by private lenders, might cost 2 percentage points more than the conforming rate. On refinancing, the fees can eat up any monthly savings you expected.

Another cost is private mortgage insurance, which you need if you put less than 20 percent down. Premiums are up in most parts of the country, and the lenders are restricting coverage in various ways. For example, PMI Group in Walnut Creek, Calif., won't insure cash-out refinances, second homes or investment properties. In Florida, it won't touch attached housing such as condominiums. MGIC Investment in Milwaukee stopped insuring second-home loans this week.

Mortgage insurance is scarce for buyers who want to put only 5 percent down. In declining housing markets, meaning practically all of them, the insurers might want 10 or 15 percent down. Genworth Financial, based in Richmond, demands credit scores of 720 and up in the most bruising markets -- Arizona, California, Florida and Nevada.

Cash-poor borrowers are turning to the FHA, which accepts down payments as low as 3.5 percent. Not surprisingly, the FHA accounted for 31 percent of the market at the end of 2008, compared with 2 percent in 2006.

Still, these loans aren't cheap. You pay an upfront mortgage insurance premium of 1.75 percent, which can be tacked on to the loan, plus a monthly premium tied to the size of your down payment. Interest-rate quotes vary tremendously, says mortgage expert Jack Guttentag, founder of the Web site mtgprofessor.com and professor of finance emeritus at the Wharton School of the University of Pennsylvania. Some lenders mark up their FHA loans much more than others. It's hard to know if you're getting a good price.

Only loans for veterans, insured by the Department of Veterans Affairs, and Agriculture Department loans in rural areas require no down payment and no mortgage insurance.

It's also taking longer to close a loan. Lenders, burned by their own sloppy practices, have gone back to checking what you say on the application, and that takes time. For example, they are routinely checking your income claims against your tax return, says Jim Pair, president-elect of the National Association of Mortgage Brokers.

Once you strike a deal on a mortgage, protect yourself by locking up the interest rate for the length of time it will probably take for the loan to close. Rates can change as much as a quarter-point in a single day. Don't accept a verbal lock, Guttentag warns. Get it in writing, with rate, points and fees disclosed. A broker might say you are locked, in hope of nipping a higher fee if rates decline. If he or she is wrong, you are the one who pays.

Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People," is a Bloomberg News columnist. Alexis Leondis contributed to this column.

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