Bargain mortgage rates aren't for everybody

Some can find mortgages below 5 percent, but rates vary widely depending on the size and type of the loan, the number of points, and the borrower's credit rating. (Globe Staff Photo / Scott Helman)

With mortgage rates falling below 5 percent in recent weeks, lots of homebuyers and those wanting to refinance their mortgage are deciding that it's time to act.

But many of those borrowers will discover the seductive rates touted in the headlines are out of their reach. Those with less than stellar credit ratings, folks with modest down payments, or those borrowing in the condominium market will find that their best rates are still above 5 percent, sometimes even topping 6 percent. Historically that's not bad, but it's well above the 4.75 percent that they may be expecting.

"A lot of people are going to be shocked, thinking they can get something and then finding out that they can't," says Amy Tierce, regional manager of Fairway Independent Mortgage in Needham. Rates headed back up over the past week, with mortgage websites listing 30-year fixed-rate loans at just over 5 percent. But those rates, too, will be unattainable to many.

Here's why: Consider the impact of a single point in a credit rating on a $417,000 fixed-rate 30-year mortgage with one point paid at closing. Recently, a borrower with a 720 credit score and a 25 percent down payment could have gotten a rate of 4.875 percent, according to Tierce. But drop that score to 719, and the rate jumped to 5.25 percent.

For condo buyers, that one-point difference in credit score would have an even greater impact, with the rate jumping to 5.75 from 4.875 percent. A two-family home? The rate goes up to 6.125 percent from 5.625 percent.

Indeed, the impact of variables such as credit scores, appraisals, down payments, and housing type is making it tough for people like Tierce to ballpark rates at all.

"I have been in this business for 20 years, and there has never before been a time when I couldn't quote you a rate off the top of my head," she says. "Now I can't do it."

Still, there is mortgage money available for those who meet today's more stringent underwriting criteria. People applying for these loans, however, should expect to provide lots of documentation, a substantial down payment if they are buying, and a fair amount of patience.

Charlo Maurer and her husband, for example, recently closed a refinancing on the Watertown house that they bought three years go, reducing their interest rate by about a percentage point to just under 5 percent. Maurer, a fee-only financial planner, said the process dragged on so long that the bank needed new documentation, including pay stubs, 401(k) statements, and bank balances.

"It definitely took longer than I expected," she said, explaining that the mortgage they applied for in December didn't close until March.

All of this attention to detail may seem draconian. But today's underwriting standards actually look a lot like they did back in the 1970s and '80s.

"In many ways, that is a good thing," says Brian Koss, managing director of Mortgage Network Inc. in Danvers. Gone are the days when lenders paid little attention to documentation because they were able to pass risk on to investors who eventually bought these loans in securitized form through the financial markets. "We are back to lending money as if it were our own money," he says.

So here are some things to consider before jumping into the mortgage market:

Mistakes still happen. Mauro, for example, found that her lender had added an additional point to her closing costs. She immediately phoned the lender, demanding that the paperwork be changed. Her advice: Make sure to carefully check all paperwork and make sure that any mistakes get corrected.

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