HOW MORTGAGE PRICING WORKS:
There is so much information out there regarding mortgage rates, costs, etc., it is very easy to see why some consumers get confused about mortgage pricing. This blog will attempt to explain to you mortgage pricing and how it applies to you and your clients.
WHAT IS THE FIRST QUESTION EVERY LOAN OFFICER GETS ASKED?
WHAT IS YOUR RATE? is by far the most common thing a potential client says first.
Unfortunately, there is not a simple answer to this question. As a mortgage loan officer, we can offer you a variety of different rates relative to the costs you want to pay.
The lower rates cost more and as we bring the rate higher, the closing costs go down. For example, when putting together a quote for a customer, I do something like this:
30 YEAR FIXED AT 4.375% – costs $4,400
30 YEAR FIXED AT 4.5% – costs $2,300
30 YEAR FIXED AT 4.625% – costs $0
When deciding what rate works best for you, you are going to want to consider how long you will be in the loan. If you plan on selling the home in 6 months, you want to keep your costs low because you don’t have the time to recoup the costs. If you plan on staying in the loan for 30 years, typically it makes more sense to pay a bit more in costs at the beginning of the loan.
WHY DO LOWER RATES COSTS MORE?
Whether you realize it or not, your loan is almost always sold immediately after the loan is completed.
The reason higher rates cost less is because a lender is making a higher premium when selling your loan on the secondary market. Thus they can charge you less and still be profitable. A lender can also do a 0 cost loan. They can do this by making enough on the sale to cover all third party charges like title, escrow, and appraisal and still be profitable.
WHY DO MORTGAGE COMPANIES DIFFER IN PRICING:
For the most part, mortgage rates and pricing should be similar if you are rate shopping. If you are rate shopping and one company is vastly superior over the others, it may be to good to be true.
Even though rates / pricing are similar between companies, they will not be the same for a variety of different reasons.
1# – Each company has a different level of profit they are making on each loan. Some companies make less on each loan, but strive to do a lot of volume.
Some companies try to make more on the loans they do fund, even though they may lose some business with rate shoppers.
A lot of times the profitability of each loan has to do with the lender’s overhead. If you have a large company that does a lot of advertising, has health insurance for all of their employees, etc, your loan is typically going to be more expensive because you have to pay for these things somewhere.
2# – Loan officers have different pre-negotiated levels of compensation. With the new lending laws that went into place in April 2011, each loan officer must have the same level of pricing on all loans. This can only change when charging upfront fees.
For example, I make 1% on every loan I do. Regardless of anything about the loan, if I fund the loan, I make 1%. Some loan officers may have a negotiated price of 1.5%. Some maybe 2%.
If a loan officer’s company prices similarly but I have a lower pre-negotiated rate of commission, I will be able to offer the better deal.
I hope this clears some of the confusion regarding mortgage pricing and makes you a more knowledgable consumer when shopping for a loan.
