Create A Rate

by : J.R. Parler


In the world of home buying, the process of finding a house and neighborhood suitable to your family's needs can become laborious even with the assistance of a realtor. However, if you truly understand your desires and needs, a competent realtor will locate your prospective home through diligence and determination. Once identified, the real journey of this process begins. This is when you must secure funding and obtain that desired rate you so desperately long for. The industry of mortgage rates is less complicated than portrayed but more sensitive than perceived. In this article, we'll try to better understand the concept and not just the numbers.

How to shop?
Opinions vary on this subject and as well they should. The reasons for the variance begin with one's position. So, the very first thing you must understand is your position. If you've never had a mortgage and are buying your first home, then the process is very different than for those who have. Furthermore, if you've bought a home in the past but later fell on financial hardships, again, your position is very different. Upon realizing what your position is, the next step is to acquire a credit report from all three major credit reporting agencies (Equifax, Experian, TransUnion). Without going into how to properly read a credit report, you must understand who determines what good credit is and how. The single largest purchase of most people will be that of a house. Therefore, the mortgage industry decides who has excellent credit and how credit worthy you are. In brief, your credit rating is determined by how many lines of credit you have, the amount of each credit line, the length of time the accounts have been open and of course your payment history. These determinations have no set formula but they do have an overall concept and perception.

After you've acquired your three credit reports, I suggest you contact a minimum of three mortgage professionals. Those three contacts should include at least one bank and preferably two mortgage brokers. Tell them you have your credit reports and do not wish for them to be pulled again. An experienced professional will understand your reasons and your position. Upon review, they should be able to give you a small range of what type of rate you can achieve within 24 hours. If you've followed this method with discipline, you needn't seek further to understand what type of rate you can achieve. All you need to understand at this point is that rates fluctuate daily and even throughout the day sometimes. Always allow yourself room for the rate to increase before securing it.

Rate Importance

As we discussed previously the importance of understanding your position, you must also understand the importance of rates and how you begin. There's an adage that claims, if something starts out wrong, it'll be wrong the whole way through. This wisdom can certainly apply to mortgage rates for an inexperienced consumer. Let's take a closer look at some sample rate scenarios and then we'll discuss the differences and opportunities you have before you.

House for sale: $200k Home appraised at: $210k

Loan amount Interest rate Term of loan Monthly payment
$200k 5% 360 months $1,073.64
$210k 5% 360 months $1,127.33
$200k 6% 360 months $1,199.10
$200k 7% 360 months $1,330.60
$10k 5% 180 months $79.08

The first thing you notice is that the term of the loans stays the same but nothing else. That's because it's a standard 30 year mortgage. After that, is where we begin the complexities but also the resolutions. The ideal scenario here is to purchase the home for $200k at a 5 percent interest rate and enjoy the 10 thousand dollars in equity. If that's not feasible, then you have to look inwardly and devise a plan to achieve your goal, while still pleasing the proposed seller. This is the fun part! Yes, I said fun. It's fun because even if you don't need to create alternatives now, you may desire to in the future for another home or investment.

Today, rates are back on the rise but whatever the rates are, you still have the opportunity to achieve something better than market value. When rates rise in the open market, sellers must be willing to negotiate unlike they may have previously. That's not a bad thing. Both buyer and seller can still supply their needs but must understand how to do so differently and more important, privately. The numbers in this example present many options depending on your situation and that of the seller. Therefore, you must be inquisitive prior to your proposal and upon submission of an offer, you can be a little gratuitous as well. I'm going to give you two propositions for the seller based on the numbers listed here.

Offer 1:
Let's assume the best offer you get from a mortgage lender is $200k at 7 percent. Offer the seller to finance you at $200k at 5 percent. You're saving over two hundred dollars alone in your monthly payment and still enjoying the ten thousand dollars in equity. Nice deal.

Offer 2:
Again, the best offer you received from the lender is as previously stated in offer number one. The seller is not agreeable to your first offer but the deal's not over yet. Now, you can offer the seller the full market value of their home at the same interest rate. That would mean now your offer is $210k at 5 percent. At this increased sales price, you're still saving over $200 dollars a month than the best offer you received from the mortgage lender. Furthermore, you just gave the seller a TEN thousand dollar incentive to complete this transaction. Wow! That's another nice deal for both parties.

As you see in the table listed above, I also included a 15 year term for a potential $10k second mortgage note. That can be used as the incentive or it can be in lieu of a down payment. The choices continue to be open and available so long as you're willing to 'create your own rate'. At this point you're probably asking why would the seller agree to these terms. Good question and let's explore that for a moment.

Reasons for Seller to consent:
1. Needs to move immediately!
2. Not much interest in home (slow market)
3. The house is already EMPTY and needs to sell.
4. The seller needs the money! (reasons vary)

In the offer to the seller, you must include a balloon payment. The reason you do this is to give the seller confidence that you can buy them out in a short period of time through refinancing. That gives you time to develop a more solid payment history when you return to a mortgage lender, thus increasing your opportunity for a better rate. Another reason you include in your offer to the seller, is that you inform them that they can SELL THE MORTGAGE NOTE IMMEDIATELY! (I buy notes.) The worse case scenario for the seller is that the note would need to be seasoned for 6 months to a year. THAT'S IT! The house could be on the open market for that long or longer. These reasons and for many reasons unknown, a home seller is agreeable to alternative measures in order to sell their home quickly and at a good price. This is the nature of good business, selling a quality product at a reasonable price and doing so expeditiously. The longer it takes to sell an item, the less profit margin there is. Keep in mind that someone is paying taxes, maintenance and potentially a mortgage on a house that's not in use. It makes perfect sense for buyer and seller alike to explore alternatives.

We've looked at just a small aspect of how you can achieve an excellent rate by taking control of your destiny. The beauty of America is the opportunity to control and create how you pursue your life and your financial security. Wouldn't you love the experience of telling your friends and coworkers that you 'created' your own interest rate? Of course you would. It's great! It's beautiful! And it's the American way.

The laws of each state vary on the particulars of balloon payments and other details in a mortgage note. I recommend you consult a professional prior to designation of such a note. Furthermore, for a note to be marketable, consult a note buyer as well.

For over a decade, I've been a mortgage professional and real estate investor. Should you seek consultation, please feel free to contact my office. Thank you and good luck!