An Odd Wrinkle In Mortgage Rates

One of the reasons that money-rates.com exists is that the market for bank rates -- including deposit account interest and mortgage rates -- is far from efficient. Everyone may talk about interest rates going up and down as if they all moved uniformly, but as you can see every day on money-rates.com, different banks offer very different rates at different times. However, the inconsistency of interest rates can get even more unpredictable than that.

Conventional wisdom (and for once, this coincides with common sense) suggests that the bigger the down payment you make on a mortgage, the better the mortgage rate you'll get. After all, a bigger down payment means more equity in the home upfront, which gives the bank more of a cushion between the value of their collateral and the amount of your loan. However, last week the New York Times reported on an interesting anomaly which made some interest rates higher for home buyers with larger down payments.

The reason is a function of Fannie Mae and Freddie Mac underwriting guidelines. The logic behind this particular aspect of the guidelines is fuzzy even by bureaucratic standards, but that's not the point. For now, this rule creates a scenario where you could pay a higher interest rate with a 25% down payment than with a 20% down payment.

The takeaway here is don't assume anything about mortgage rates, or other bank rates for that matter. You not only have to compare different institutions, but when doing so, you should be very specific about the mortgage terms you have in mind. You also may want to run a couple different scenarios by potential lenders -- you might be surprised at which results in the best terms.

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