If you haven’t been referred to a mortgage lender by your real estate agent, coworker or a friend and you’re getting ready to either refinance your mortgage or finance a new purchase, no doubt you’re getting ready to play the “rate quote game.”
And if you’ve been doing a little initial research online you’ll soon begin to see advertisements from mortgage companies if you haven’t already. After a few queries you might very well find the process bewildering. And perhaps rightfully so as mortgage lenders have at their disposal multiple loan options and pretty soon it gets to be a bit much.
Lenders know that when they get a new call from a potential client they must present their very best offering knowing they’re competing with not just a few lenders around town but also across the country. But if you’ve been looking at rates over the past couple of weeks or so you can easily see it’s not an easy task when comparing one lender’s rate with another. Interest rates can change from one day to the next and even during the course of a business day!
Why don’t lenders just establish their interest rate and leave it at that?
Why make it so confusing?
Here are some tips to help you get a proper rate quote from a company you can trust and easily compare rate quotes from one lender to the next. Let’s first examine why rates can change the way they do.
The Mortgage Rate Quotes Bond
Fixed rates are tied to a specific mortgage bond and all lenders set their rates based upon the performance of a particular bond. For example, a 30 year conventional rate is pegged to the current FNMA 30-yr 3.0 bond. A 15 year is tied to the FNMA 15-yr 2.5 bond. And as with all bonds, as the price of the bond goes up the yield, or the rate, falls accordingly. And the opposite is true when the price falls rates will rise. Each day mortgage lenders price their interest rates for the day based upon the current trading activity of the respective bond.
Why Does The Price of The Bond Rise and Fall?
Investors typically purchase bonds as a safe haven in times of some level of economic stress. When stocks aren’t doing all that well investors can choose to stay away from stocks and into the safety net of a bond. The yields aren’t all that spectacular with a bond but it’s better than losing money.
Investors evaluate the current and future economic trends in order to make investment decisions and if investors feel the economy is going to improve they’ll sell their bonds and put money into stocks. As more and more investors sell bonds the demand for them falls and as such the price of the bond will fall. And as we mentioned, when the price of a bond falls the yield will rise. This yield is expressed as an interest rate.
Note here that we didn’t mention anything about the Federal Reserve raising or lowering interest rates. The Fed can and does raise and lower rates but they directly affect what is called the Fed Funds rate, the rate that banks can charge one another for overnight loans needed to shore up reserves for the day. Accordingly, the Discount Rate will also adjust and is the rate the Federal Reserve Banks charge individual banks for the same type of short term lending. The Fed does not raise or lower your mortgage rate.
Timing of Mortgage Rate Quotes
Now that we understand how lenders set their interest rates each day and they can not only change from day to day but during the course of a business day, let’s see how we can apply that knowledge with getting a competitive quote that you can compare with various lenders.
Mortgage companies have a special department that is in charge of setting interest rates each day called a Secondary department. This division does nothing but price loans based upon the performance of its relative bond as well as buy and sell mortgage loans in the secondary market. In the same manner that you can’t really compare a rate quote you got last week with one you received just this morning you can’t also truly trust rate quotes when they’re obtained during different times of the day. That said, get various interest rate quotes not only on the same day but around the same time of day.
Apples Not Oranges
It’s also critically important to make sure you’re getting rate quotes under the very same set of circumstances. You can’t compare a 15 year rate quote from one lender to a 30 year quote from another. Instead, you must decide firsthand the type of mortgage you’ll need. If you want a 25 year loan, then make sure you stick with that one when getting quotes.
Make sure you get a rate quote covering the same time period as well. When you lock in an interest rate, the longer you lock the higher the rate or fee. A 30 year fixed rate that is good for 90 days will be slightly higher than one for 15 days for instance. When getting a rate quote ask for a 30 day quote to make sure you’re comparing apples with apples.
The lenders will also want to know about your credit as well as how much down payment you have. All lenders use what is referred to as a Loan Level Pricing Adjustment table that adds or subtracts fees based upon a credit score and equity in the transaction. Someone with a 25% down payment and a 750 credit score will have a slightly better rate than someone with a 660 score and 5.0% down for instance.
Also Ask For a List of Lender Fees That You Might Encounter
If two lenders offer the very same rate quote they may also have different fees. You want the rate quote with the most competitive set of lender fees. Note, compare lender fees only, not other charges such as title insurance or recording fees, such charges lenders have no control over.
This process works the same way when you’re comparing adjustable rate loans and hybrid products such as a 3/1 or a 5/1 mortgage. Jumbo loans fall into this category as well. As long as you’re comparing the very same product at or near the very same time of day you’ll be able to make a better decision.
Finally, it’s not always about the lowest rate. Because lenders set their interest rates on the very same set of indices all lenders will be very close in rate with one another. But while getting the best deal possible is the reason for all this shopping around make sure you’re working with a lender you can trust and who will close your loan on time. If you get quotes from some online lender somewhere that might be very tempting it’s likely your loan application will end up being underwritten by someone in Boca Raton, Florida or some such destination. Work with someone who has a local reputation to uphold and has been in the business for a while.
When you do find a lender you like and the rates are competitive, you need to understand that you won’t be able to lock in any rate until you’ve completed a loan application with that particular lender. Lenders take mortgage interest rate locks just as seriously as you do. When a borrower completes a loan application and locks in an interest rate and for some reason the loan never closes, the lender who committed a rate to that borrower now has a commitment they have to honor. They can even go as far as finding another loan applicant who has not yet locked and offered the lock to them. If a lender finds they have too many loan commitments that never fund it can increase the cost of their own funds and increasing their interest rates offered to borrowers. That can put a lender out of business.
What you can expect however is the ability to lock in an interest rate once your loan application has been submitted and a property address selected. If you’re refinancing the property address is obvious but with a purchase the lender needs to have a copy of a sales contract signed by both parties.
After your loan application has been preapproved and a property identified, a good lender goes beyond just a standard approval and works as your partner during the process.
How quickly does the lender respond when you call or email with a question?
When making an offer, does your preapproval letter state what items have been verified such as sufficient funds to close, credit qualification and debt to income ratios have been reviewed?
A solid preapproval with accurate numbers will help separate your offer from others.
It’s really not complicated at all when getting rate quotes it just seems so if you’re not familiar with how lenders set their mortgage rates throughout the day. But now that you know how it’s done, it becomes a piece of cake. Just remember, it’s more than just the rate. It’s the reputation and performance from the lender.