What Are Mortgage Rates? Get Your Calculator

Blend of Two Variables

Answering the question, "what are prevailing mortgage rates?" seems simple enough.

After all, the answer should be "5%," "5.25%," or something similar, depending on one's credit scores, and the mortgage product in question (fixed, 5 yr ARM, 10 yr. ARM, etc.).

In practice, it's a little more difficult, because rates are really a function of two variables: the quoted mortgage rate, and the lender's origination fee (also called "points" -- essentially, their commission).

So, whereas a week ago rates may been quoted at 5.25% and .75% points, this week they might be 5.375% and 1% origination.

To make an apples-to-apples comparison, you need to get out a spreadsheet and tweak the mortgage rate by the imputed rate of return on the lender fee (or at least, I think that's what the MBA-types would say).

Fannie & Freddie "Add-On Fees"

"Airline Pricing" Spreads to Mortgages

Both Fannie Mae and Freddie Mac say they are tacking on extra fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores . . . However, real estate agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments.

--Kenneth Harney, "From Fannie and Freddie, Here Come the Fee Increases"; The Washington Post (2/14/09)

Call it the spread of the "airline industry model." *

They can't figure out how to make money -- in fact, they lose billions every year -- so they have to recoup it any way they can. So they start tacking on fees -- lots and lots of them. For checking extra bags, in-flight food, headphones, fuel surcharges -- you name it. Each year, the list only grows longer -- and more annoying.

Get ready for the post-housing bust Fannie and Freddie pricing model. In addition to paying mortgage interest, borrowers can now expect to pay two different kinds of add-on fees:

One. Premiums, called "delivery fees," for Buyers who can't meet (newly conservative) downpayment thresholds; and

Two. Surcharges for disfavored housing categories (because they're supposedly higher risk). That includes condominiums and owner-occupied duplexes.

Just one more illustration of the old saying about banks "lending you an umbrella when it's sunny and demanding it back when it's raining."

And that's private lenders.

Add government bureaucracy and inefficiency to the equation, and you get the worst of both worlds (JFK famously remarked that Washington "combined the charm of a northern city with the efficiency of a southern one").

*The other parallel with airlines? Custom pricing (no two borrowers pay the same rate) that literally changes minute-by-minute. I attribute this latter phenomenon to modern computing power as much as anything else.

$3,000 ATM Fee?

Cheap Money Elusive for Many

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about who they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

--"Costs and Tighter Rules Thwart Refinancings"; The New York Times (1/24/09)

The big drop in interest rates -- from over 6% to under 5% -- isn't stimulating the housing market as much as hoped because many would-be borrowers and refinancers don't qualify. Depending on the individual housing market, as many as two-thirds of applicants are denied (in the Twin Cities, the number I've heard is 50%).

Many of the remainder still may not get the best, advertised rates, due to something called "risk-based pricing." Just as some people pay 7% on their credit cards and others pay 22%, mortgage rates now vary considerably depending on your risk profile.

To add insult to injury, lenders are now imposing additional fees on weaker credit risks to compensate for their projected higher risk of default. (Such an approach may make sense now, but it smacks of "gotcha" to millions of borrowers who faced no such hurdles when they signed up for their original loans. On the contrary, lenders pitched low initial "teaser" rates, "option-ARM's" and other sugar-coated loan features.)

The net result is a huge winnowing-out factor for those trying to lower their payments and/or switch out of risky mortgages.

Oh, and forget about "cash-out refinancing" -- using your house literally as an ATM. Even if you have enough equity to do it, the cost is likely to be prohibitive: anywhere from $500 to $3,000 to access $100,000 of your equity.