Many potential borrowers do not understand how the price of a specific type of mortgage at a specific point in time varies with the features of the transaction. There is always a "best price" for a transaction that is viewed as least risky to an investor, and then there is your price, which could be the best price but may well be higher.
A number of transaction features affect the price. The state in which the property is located affects the price because of differences in state laws relating to foreclosures and other factors that affect the cost of servicing a mortgage. These price differences are small, however.
The borrower's credit score has a major effect on price, as well as on the ability to qualify. This reflects the documented relationship between credit score and the probability of default.
Borrowers who refinance in order to take out cash also pay heavily for the privilege. The need to withdraw cash is viewed as an indicator of financial weakness, which increases the likelihood of default.
Borrowers shopping for a mortgage should compare the price of their loan with the best price, because there may be things they can do to reduce the price.
For example, a borrower with a credit score of 659 could reduce her mortgage price by raising her score by only 1 point, which might be possible merely by shifting some credit card balances from one card to another.
The price adjustment process also carries an important implication for borrowers who believe that they can shop for a mortgage by requesting loan officers or brokers to quote prices. Unless the request for a price quote is accompanied by a complete list of the relevant transaction features, the shopper will be quoted the unadjusted price. For many if not most borrowers, that is not helpful.
So where can borrowers go to find out how the price of their transaction compares to the best available price? To fill this void, I recently added this facility to my website, www.mtgprofessor.com. To my knowledge, it is the only source of transaction-based price adjustments available on the Internet.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
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