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Shopping For Rates

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Posted On: 03/19/2014

Question:

We are refinancing our home. In speaking with several lenders, it was amazing to see that the interest rates they quoted were very close. Is this typical?

Answer:

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I’m not so sure if it’s typical, but it’s certainly not surprising in today’s mortgage marketplace. Here’s what’s going on.

A number of new financing standards have gone into effect due to the Dodd-Frank Wall Street and Consumer Protection Act. The new rules largely represent a return to the lending standards that were in place before the mortgage meltdown, a period when both foreclosures and lender losses were rare.

There are three likely reasons why you’re seeing tightly bunched loan quotes.

First, lenders want your business. According to the Mortgage Bankers Association, 2014 will not be a great year for loan originations. It predicts that loan volume to purchase homes will pick up by a mere 3.8 percent.

Meanwhile, refinancing activity is expected to drop by 60 percent. The result is that borrowers have a lot of leverage in the marketplace.

Second, new lending rules encourage lenders to quote mortgage rates within a tight band.

Under Wall Street Reform, lenders are encouraged to make “qualified mortgages,” loans that meet certain standards. There are a variety of rewards for lenders who offer QMs, including virtual immunity from borrower legal claims.

Among the QM standards are rules that relate to interest rates. In brief, the deal is that when a loan is for $100,000 or more, most lenders will want to offer an interest rate that is not greater than 1.5 percent above the Average Prime Offer Rate.

With such a rate the lender will have substantial immunity against potential lawsuits.

Borrowers should be aware that the APOR and the APR are different financial measures: The APOR is an index published by the federal government, while the APR – the annual percentage rate – reflects the cost of the loan, including expenses in addition to the interest rate.

That get’s us to the third point: Lenders can charge more than 1.5 percent above the APOR if they choose, so borrowers still need to shop around. That’s the sure way to understand the marketplace and get the best rates and terms.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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