You may wonder why mortgage lenders are very competitive as it relates to mortgage rates. First, they must be competitive in price along with a strong reputation in the community, service and communication. You won’t find one mortgage lender quoting interest rates a full percentage point on the very same loan program and terms offered by other mortgage lenders.
Interest rates can change daily and even during more volatile times, mortgage rates can change throughout the course of a single business day. But there is a rhyme and reason for rate moves. Further, there are rate differences depending upon a particular loan program as well as the amount borrowed.
But let’s first take a look at how lenders price their mortgage rates each and every day and then look at the differences based upon the amount borrowed.
The Index
Let’s examine the most common mortgage program available in today’s marketplace, the 30 year fixed rate loan. The 30 year fixed rate is tied to what is known as the Fannie Mae 30 year Mortgage Bond and is in fact a bond just like any other. Investors buy bonds as a safe haven for their funds as they provide a guaranteed return, albeit rather low compared to other investments. The particular bond mortgage lenders look at when setting their interest rates for the 30 year fixed is the FNMA 30-yr 3.0 and is a publicly traded asset.
This is why rates from one lender to the next can be very similar because lenders are using the same FNMA 30-yr 3.0 gauge. When the stock market has investors a bit rattled or some economic data is released indicating a slowing economy, investors will have a tendency to pull money out of stocks and into bonds, including mortgage bonds.
As the demand for bonds heats up, it drives up the price of the bond. When the price of a bond, any bond, rises, the yield- or the rate- goes down. When stocks are beginning to heat up, investors sell bonds and move back into stocks. Investors anticipate what bonds will do and as economic data is released, react accordingly.
For example, say the unemployment report is released and it’s great news for the economy and 300,000 new jobs were created in the previous month. This will cause a selloff in bond markets causing rates to rise due to the falling price of the bond. Or, the unemployment rate goes up and the economy is shedding jobs, not adding them. Guess what? That’s right, rates will begin to move down.
What is a Conforming Loan?
A conforming loan is so called because the loan “conforms” to guidelines issued by mortgage giants Fannie Mae and Freddie Mac. Conforming loans must adhere to these universal guidelines which allow the lender to sell a conforming loan later on to other lenders or directly to Fannie Mae or Freddie Mac. Selling loans replenishes the lender’s credit line allowing the lender to continue making more loans. Other conforming guidelines limit the number of units allowed. For example, a single family home meets the guidelines as well as a 2-4 unit, sometimes referred to as a “fourplex.” Any property with more than four units is not eligible for sale as a conforming mortgage.
Another guideline is the amount borrowed. Currently, the maximum conforming loan limit is $417,000 but will increase to $424,100 and in so-called “high cost” areas such as San Diego County, the high balance loan limits will also increase to $636,150 from $625,500.Loans at these levels may still be sold as a conforming loan but are considered “high balance” and may carry slightly higher rates compared to a conforming loan. In a sense, a conforming loan is like a commodity and can be bought and sold several times because the buyers know the loan meets the required guidelines.
Any mortgage loan above these amounts is referred to as a “jumbo” loan and will carry slightly higher rates than a conforming or high balance loan. How much so?
Comparing Conventional Mortgage Rates
As you know, mortgage lenders offer different rate options based upon the addition of discount points. A point is one percent of the loan amount and is considered a form of prepaid interest and is used to buy down the rate. For instance, if a mortgage lender offers a 30 year rate at 4.00% with no points, the borrowers may elect to pay a point to lower the rate from 4.00% to say 3.75% or thereabouts. All that said, when comparing rates between a conforming, a high balance and a jumbo, we’re going to assume there are no points involved.
A high balance loan amount is typically 0.25% to 0.375% higher than a conforming loan. A jumbo rate, rates for loans above the high balance mark, is often found around 0.125% higher than a high balance 30 year fixed rate loan yet many times the rates are very similar, if not the same.
Conforming rates will typically be the lowest available compared to other mortgage programs simply due to the number of conforming loans made each year. Fannie Mae and Freddie Mac-eligible loans make up around two-thirds of the entire mortgage market. Such a deep pool of buyers and sellers keeps the lenders competitive as it relates to price.
If you’re in a situation where the loan balance means a slightly higher rate, work with your loan officer to look at other structures. For example, it might work to your advantage to take out two mortgages instead of one to limit the first mortgage to a program with the lower rate and follow up with a second loan to make up the difference. Or, current market rates might mean there is very little, if any difference between a conforming and a jumbo. Markets as well as mortgage rates change and there have been times when a jumbo rate was the very same as a conforming one.
