Mortgage Pricing Systems have a critical role to play in mortgage origination. These systems are what decide the rate and amount a borrower should be given for a home loan. Simply put, mortgage pricing systems are at the center of the mortgage lifecycle. We have previously discussed how these systems can be integrated with mortgage CRM and the loan application process. In today’s blog, we will discuss the factors that affect mortgage pricing and how innovation in financial services is making mortgage pricing systems more reliable and efficient.
How Mortgage Pricing Systems Work
The mortgage market is very dynamic. It moves often with many factors affecting the rate offered to individual borrowers. There is no single rate or flat rate concept for a mortgage and each lender has their logic for calculating mortgage pricing. Fintech companies like inflooens, providing mortgage LOS with mortgage pricing systems incorporate customizable solutions for lenders. Let’s look at the key factors that are considered in these systems.
Image 1: Factors Affecting Mortgage Pricing System
The type and usage of property are considered for mortgage pricing. Usually, condos, high-rise condos, and multi-rise units have higher interest rates compared to single-family dwellings. Also if the borrower intends to buy the property for investment, it will attract higher interest rather than an owner-occupied property.
2. Credit Scores
The credit score of an individual is based on their credit history. Things like the number of bank accounts, credit card payments and defaults, total debt, and loan repayment history are considered while calculating the credit score. This factor significantly affects mortgage rates as it represents the creditworthiness of the borrower. A borrower with a higher score is likely to be approved for a lower rate compared to one with a lower credit score. For example, a borrower with a credit score of 750 may get a 1% lower rate than a borrower with a score of 650, depending on the calculations of the lender.
3. Loan to Value (LTV)
Loan to Value is the ratio between the loan amount and appraised value to the house, expressed as a percentage. For example, if the appraised value is $100,000 and the down payment made by the borrower is $10,000, then the LTV is 90% ($90,000/$100,000). This ratio shows how much equity the borrower has in the property. A lower LTV typically means a lower mortgage lending rate.
4. Loan Amount
Loan amount is an important factor in deciding mortgage rates. Both, very high amounts and very low amounts can attract high mortgage rates. This is because, high-value loans are riskier for the lender, in case the borrower defaults. On the other hand, with a low amount, the added cost of loan origination is built into the mortgage rate and may add even upto 0.75%.
5. Rate Lock Period
A borrower can lock in the interest rate for a mortgage before the close of escrow. This is usually done 15, 30, 45, or 60 days in advance. Most rates are quoted by lenders for a short lock-in period of 15 days. This means the longer the lock period, the higher will be the rate. This is because there will be less fluctuation in the market in a shorter period compared to a longer one where the risk for the lender will be increased.
6. Loan Maturity/Fixed Period
The borrower can opt for long-term periods of loan maturity, the most common are 15years and 30 years. In the case of a longer loan maturity period, the risk of the bank is higher as the period has more chances of market and borrower uncertainty. For this reason, a shorter loan maturity for fixed rate has a lower interest rate. For exampke, a 7/1 ARM (fixed for 7 years) will have a lower rate than 15-year fixed-rate loan, which in turn will be lower than a 30-year fixed-rate loan.
Image 2: 30Yr vs 15Yr Fixed-Rate Mortgage Image source: http://www.freddiemac.com/pmms/#
7. Combo Loans
Combo loans are where the borrower takes out two separate loans from the same lender. They are sometimes also referred to as piggyback loans. The way it usually works is that the lender first provides a construction loan to build the property. When the construction is completed, a second loan is granted, usually a long-term fixed-rate loan. This is used to close the first loan and continue monthly payments till maturity. It can save the borrower from paying for private mortgage insurance. On the other hand, Combo loans may have a higher interest rate for the second loan, apart from the additional fees for 2 loans.
8. Processing Fees
Application processing and loan origination is a costly affair for lenders. These costs are passed on to the borrowers and calculated as a part of the mortgage interest rate.
Some loans have refinancing fees built-in. These have lower mortgage rates than “No-Cost” refinances because extra fees need to be paid to cover closing costs. Also in the case of cash-out refinancing, when borrowers increase their loan amount, rates are typically higher, depending on the LTV ratio.
Lenders require reserves for meeting their liquidity criteria. This means that the borrower needs to demonstrate the ability to pay back the loan with bank statements that show sufficient cash availability. This significantly influences interest rates. Higher reserves can result in lower mortgage rates.
Mortgage Pricing Sytems handle complex calculations that take into account various factors. There is a need for smart and intuitive tools to perform these tasks efficiently. With innovation in financial services, technology is at the forefront to enhance these processes. inflooens is the best mortgage origination platform that integrated mortgage pricing systems. These can be customized as per the lender’s requirements to provide the most accurate mortgage rates for borrowers.