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How to Handle Those Mortgage Rate Add-Ons

NEW YORK ( TheStreet) -- With the Federal Reserve's decision last week to stay the course on its low-rate policy, mortgage rates have been drifting down. But they remain a good deal higher than they were last spring, and you might end up paying a good deal more than the rate you see advertised.

How come? Advertised rates usually involve the best case -- the rate offered applicants with the highest credit ratings, buying homes in the best locations, and so on. Add-ons reflect higher risks associated with certain factors.

To find the rate you'll end up with, you'll have to talk to the lender, and perhaps fill out an application. But here, from The Mortgage Professor website, are a few examples of how add-ons can boost the rate.

Let's say you applied for a 30-year fixed-rate mortgage advertised at 4.375% for a $300,000 home with a 15% down payment. 

If the home were in California rather than Texas, the rate would increase by 0.018%, reflecting slightly higher risk to the lender because California's laws on foreclosures are kinder to the homeowner. Making a smaller payment, so the loan was $255,000 instead of $225,000, would increase the rate by 0.033%.

The best rate assumes a top-quality FICO Score of 800. If your score were only 620, expect the rate to increase by 0.401%. If this were a cash-out refinance, rather than a no-cash refinance, you'd also pay an additional 0.401%.

For a loan on a condo rather than a single-family home, you'd pay an extra 0.1%. For an investment property rather than a primary residence, the rate would go up a full 0.502%. And opting for a 60-day lock-in period on the rate, rather than 30 days, would boost the rate by 0.033%.

If you were unfortunate enough to have all these add-ons, your rate would be 5.863%, not 4.375%.

These are just examples, of course, and any given lender's premiums could be different. But if any of these factors apply to you, you will likely pay more, because lenders must abide by the standards set by Fannie Mae and Freddie Mac, which back most new mortgages these days.

Fortunately, you do have control over some of these factors.

"For example," says the mortgage professor, Jack M. Guttentag, "a borrower with a credit score of 659 could reduce her mortgage price by raising her score by only one point, which might be possible merely by shifting some credit card balances from one card to another.

"Another borrower might find a less-costly way to raise cash once she realizes that the higher price of a cash-out refinance is paid on the entire new loan amount, not just on the loan increase required for the cash advance."

To see how add-ons might cause your application to be rejected, try this tool on Guttentag's site.

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