“What is your rate today?” prospective borrowers ask when they call up a mortgage lender shopping for rates. Well, there isn’t just one rate. There is a choice of rates and the rates are very similar from one lender to the next – perhaps identical.
A Loan Officer’s Rate Sheet
Every morning a loan officer gets a rate sheet – or a number of them. Mortgage bankers get the rate sheet from their company. Mortgage brokers get rate sheets from a number of wholesale lenders. They come in across the fax machine, across the computer, or through various secure web sites requiring confidential user names and passwords.
On volatile days, there may be revisions to the rate sheets. There have been times when rate sheets were revised more than five times in one day.
These rate sheets are not designed for public view. They are for loan officers’ eyes only because they represent the “cost” of a loan to the loan officer, not the cost to the borrower.
Below is a sample of one section of a rate sheet for thirty-year fixed rate loans.
Rate Cost vs points to get the rate
4.625% Cost is .625% Discount Points x loan amount
4.75% You actually get a credit to you of .125%
The higher the rate the less it costs. The lower the rate the cost goes up. It all depends on what the bond market is doing at the time.
The rate sheet shows the interest rate and the “cost” to the loan officer, expressed in “points.” One point is equal to one percent of the loan.
Pricing the Loan
Different rates have different costs. Higher rates don’t cost as much as lower rates. This is because the lender is going to earn more in interest over the life of the loan, so it makes sense to charge less. Conversely, it makes sense to charge more for a lower interest rate, because the lender will earn less interest over the long term.
Zero points is called “par” pricing. Numbers in parentheses indicate “premium” or “rebate” pricing, meaning that instead of having a “cost,” money is actually paid back to the loan officer and the branch for originating a loan at that rate.
Almost all loan officers are paid on commission. The amount earned by the loan officer and the branch is subject to a “split” — just like real estate agents. Part of it goes to the loan officer and part goes to the branch. Any fees that are not part of the points go to the branch (or company) and are not subject to the split.
Quoting Rates to You
Before quoting you an interest rate, the loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on how little that can be (the minimum amount the loan officer adds on to his cost) but does not want to overcharge borrowers either (so they set a maximum the loan officer can charge) Between that minimum and maximum, the loan officer has a great deal of flexibility.
For example, say the loan officer decides he and his branch are going to earn one point. When you call and ask for a rate quote, he will add one point to the cost of the loan and quote you that rate. According to the rate sheet above, seven percent will cost you zero points. Six and three-quarters percent will cost you one point.
In our example, at 7.125% the loan officer and branch would earn one point and have some money left over. This could be used to pay some of the fees (processing, documents, etc), which is how you get a “no fees -no points” mortgage. You just pay a higher interest rate.
Locking in Interest Rates
The rate sheet on the previous page was incomplete. Time is a factor in pricing interest rates, too. Because interest rates change daily (and sometimes during the day) the longer a lender locks in a rate, the more risk that they have the market will move against them. Therefore, you pay more (in points) for a longer guarantee.
If interest rates are trending up, it makes sense to lock in your rate. If interest rates are trending down, it makes sense to “float” your interest rate so that you can take advantage of a shorter lock-in period. When rates are fairly stable, it also makes sense to “float” your loan to take advantage of a lower price for a shorter lock-in.
Risk and Market Fluctuation
Even when it is easy to predict a trend in interest rates, choosing not to lock in is a risk. That is because, even in the middle of a trend, the daily fluctuations of interest rates can be extremely volatile. Daily economic news affects interest rates, sometimes dramatically.
For example, if more new jobs were created in the previous month than the prognosticators expected, that could indicate the economy is speeding up faster than expected, which could be inflationary. Interest rate markets fear inflation. The day new employment figures are announced (the first Friday of each month) rates could swing wildly to the up side. A few days later the Purchasing Managers Index might show a smaller number than expected and rates will fall again.
You may reach a day when you have to lock in — because you cannot draw the loan documents without locking in a rate. That might be a day when rates are up, even though they are trending downward. Locking in your rate provides a nice safe guarantee — providing you close on time. It makes sense to build in a cushion because no one can guarantee you will close on time, even though everyone tries their best.