During my 25+ year career as a loan officer, I’ve had to compete against many loan officers who advertise unusually low rates. While some people can technically get the rates that some of these loan officers advertise, it’s usually a very rare situation.
Factors That Determine Rates On an Individual Loan:
I’m not a fan of advertising low rates (or rates in general) because rates are a very individual thing and determined by the following:
- Loan type (FHA, Conventional, VA, USDA, etc.)
- Loan purpose (Purchase, non cash-out refinance, cash-out refinance – cash-out refinances can have a relatively high loan-level pricing adjustment at 75% LTV and higher at 80% LTV)
- Loan amount (usually the larger the loan amount, the better the rate up to the maximum conforming loan limit)
- Occupancy type (Owner occupied, 2nd home, investment property – loans to purchase rental properties have a 2.125 point loan-level pricing adjustment at 70% LTV (I’ve seen it below that and I’m starting to think it’s a permanent thing) and 3.375 points at 80% LTV – in addition to some other related LLPAs – this is why rates for investment properties are so much higher than OO properties)
- Credit score – this is especially important for conventional loans
- Loan-to-value (typically the lower the LTV, the better the rate
- When you lock your rate (rates are based on the price of the benchmark bond specific to the loan type you are getting and they change constantly throughout the day)
Another key thing to understand when a loan officer or company quotes a rate is what fees are assumed. The rates I quote are without a 1% origination fee (which means the rate is typically about .25% higher than a quote with a 1% origination fee. When quoting rates, we are required to include the APR the lower the rate the lower the APR regardless of what the cost is to get the rate (almost without exception). Hence, some companies / loan officers will quote low rates even though it is cost-prohibitive for most borrowers. About a month ago, I was contacted by a potential client who was referred to me by a friend. She had already applied with a company that advertises on national TV a lot. They advertise quick closes and low rates. She told me that the rate she was offered was 4.00% with a 1.7 point cost. I was able to offer the same rate with about 1 point less in cost or for just below the cost she was paying with them, I could get her 3.75%. It’s really important to compare apples to apples.
There are a few other things that can play a factor with regard to rates but these are the main things and when loan officers advertise rates on the radio, a billboard, or other places, I’ve found that the rates are often times unusually low and it comes across to me as unethical. I read as much of the fine print I could on a billboard ad the other day for an interest rate that seemed quite low to me and the advertised rate was based on a borrower who could put 25% down (this is a very rare situation) and has a credit score of at least 740 (it may have been 760). I didn’t get to see the other parameters but I’m sure it was for an owner occupied property on a $300,000 loan amount (give or take) using a conventional loan to purchase a single family residence. I would estimate the percentage of home buyers who put 25% down is about 3%, give or take.
The Mortgage Bond Market – How Rates Are Determined Market-wide
Mortgage bonds, like all other securities, are traded every day. The FNMA benchmark bond determines rates for conventional loans while the GNMA benchmark bond determines rates for FHA and VA loans. The rate moves inversely to bond price which means that when there are more buyers than sellers for a bond, price moves up and rates move down. Conversely, when there are more sellers than buyers for mortgage bonds, prices will be pushed lower and rates will go up. Theoretically, 50 basis points is equal to .125% in rate (loan-level pricing adjustments are often based on this), theoretically, but there are often times when it costs more or less than that to buy the rate down. Typically, the further away (in the lower direction) you are from the par rate (the rate at which there is not cost or credit), the more each .125% will cost. Depending on the yield curve, it’s quite possible to pay somewhat less than .5 points to lower the rate by .125%.
The price of mortgage bonds are impacted by the economy, both our nation’s economy as well as the global economy, as well as geo-political concerns in addition to things like natural disasters. When bad things happen (wars, viruses like the coronavirus, or huge storms or earthquakes) there is often a “flight to safety” which means that investors will sell stocks and buy bonds to protect their principal. Bonds have long been considered a safe-haven investment (although plenty of people have lost lots of money investing in bonds). When the economy is strong, money is usually poured into the stock market for the better return the equities markets typically offer relative to those of the debt market (bonds). When the economy is weak, investors sell stocks and move into bonds. Currently, we have a strong economy which is offsetting the scare of the coronavirus so the bond market is trading in a very narrow range. Like in the stock market, the bond market has technical indicators (support and resistance levels, moving averages, and the relative strength index) to give us some indication as to where the price of the bonds will go next – it’s certainly not fool-proof but it does help.
Understanding the bond market and the things that impact mortgage bonds is a great way to have the best guess about when to lock the rate when a borrower is in the process of getting a loan. 30-day locks are free and longer locks usually cost (time really is money). The cost is typically .125 points for 15 days up to 30 days beyond the free 30 day lock. Beyond that, the cost typically goes up for each 30 days. We can lock as long as one year in advance but it does cost and there is a half-point deposit required for this. This is good for one-time close construction loans and for people who may not be buying for a while but think that rates are going to trend up as they do when inflation is on the rise.
What Does All of This Mean?
No one can guarantee you the lowest rate. There are a wide variety of business models when it comes to mortgage companies – some offer the lowest rate possible but the loan officers at companies like this are typically on a salary and get paid regardless of whether the loan closes or not and there is no incentive for them to be among the best in the industry. Other companies may have rates that are a bit higher (.125% – .375%) but the loan officers at these companies are usually commission-only so they are incentivized to give excellent service and have expertise on all of the loan products and sometimes on other financial matters (such as how your mortgage fits in with your overall financial goals). Sometimes, a loan officer working at a company like this can get rates as good as the discount mortgage companies by locking at the right time. Additionally, the knowledge they can provide relative to structuring your loan to help you achieve your financial goals can often more than offset any difference in rate – low rates are only part of the financial equation when it comes to your overall financial pictures and having money to invest, and what you invest in. Finally, a good loan officer will have a network of professionals including a CPA, estate planning attorney, and investment advisors / financial planners to refer clients to for help establishing a solid financial plan and achieving their financial goals.
If you would like to know what your mortgage options are (either to buy a home or refinance) and how they will impact your financial goals, feel free to contact me to schedule an appointment for a personal mortgage review –/ or email me at email@example.com.