Mortgage Rates and Pricing

"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
. . .
6.250% 2.000
6.375% 1.500
6.500% 1.000
6.625% 0.500
6.750% 0.000
6.875% (.500)
7.000% (1.000)
7.125% (1.500)
7.250% (1.875)
7.375% (2.125)
7.500% (2.375)

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.

Rate 15 days 30 days 45 days

6.250% 2.000 2.125 2.250
6.375% 1.500 1.625 1.750
6.500% 1.000 1.250 1.375
6.625% 0.500 .625 .875
6.750% 0.000 .250 .375
6.875% (.500) (.250) (.125)
7.000% (1.000) (.750) (.500)
7.125% (1.500) (1.250) (1.000)
7.250% (1.875) (1.625) (1.375)
7.375% (2.125) (2.000) (1.750)
7.500% (2.375) (2.250) (2.000)

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.

Shopping for Rates

All the "experts" tell you to "shop for rates" -- but they don't tell you how to shop for rates. Without an understanding of how loans are priced and lock-in periods, calling up a lender to find out their interest rate could provide you with mostly useless information. So if you didn't read the previous two sections to this article, click here.

If you simply call up and ask for interest rates, a lender can tell you anything. One lender may quote a "floating" rate (seven or twelve day lock) and another may quote you a forty-five day lock. Another lender may quote you the rate for two points and another may quote you the rate for one point. If you call lenders on different days, you could get widely different quotes because rates don't stay the same every day.

That isn't shopping for interest rates.

When you call a lender to shop for rates, you have to know at least two things: how many points you want to pay and how long you want to lock in the rate. You don't have to really intend to lock in the rate, but you have to give them all the same parameters so that you get meaningful quotes. You also have to get your quotes all on the same day.

By the way, you can't trust ads in the newspaper, on the radio or on television. Ads are generally placed at least a day in advance. Since rates change every day, ad quotes aren't reliable.

Is the Quote Reliable?

Lenders know when you're just calling up to get a rate quote. They know you are calling up their competitors. When you ask for a rate quote for a specific lock-in period paying a specific amount of points, most lenders will give you a reliable quote. But you're applying pressure for a great quote. You let the loan officer know you're "shopping around." You want the "best deal."

What do you think happens?
At least one loan officer will lie to you. If he doesn't fudge the rate, he doesn't have a shot at your loan because someone else will lie to you. Plus, you can't check anywhere to see if he is telling the truth. You're not likely to immediately fill out an application and lock in the false rate you were quoted. You're going to keep calling around and shopping and maybe tomorrow you'll call back whoever gave you the best quote.

Truthful, ethical loan officers will not get your loan.
By the time you are ready to really lock in your interest rate, you'll be quoted accurately -- or maybe not. If someone would lie to you to get the loan, they aren't ethical. They may jack up your rate at the end of the deal when your options are limited. You probably won't even realize he's doing it because you aren't shopping interest rates anymore.

How to Really Shop for a Lender
The best way is to get a referral (from a Realtor or a friend), then shop other lenders. Do it properly, telling the lenders how much you are willing to pay in points and how long you want to lock in the rate. Make all your calls on the same day. Tell the lender you have already filled out an application and that you are willing to fax it in, so the rate has to be something he can deliver.

Get the best quote under those conditions, then call the lender who was referred to you. Tell him what you found out and he will tell you if it is real or not -- and whether he will match it.
Then you choose your lender.

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About Blaine Morris, Marin Properties

As a top-producing licensed REALTOR with Frank Howard Allen in Greenbrae, California, Blaine Morris specializes in Central and Southern Marin County. Always just a phone call or email away, Blaine works seven days a week for his clients, providing them with the utmost in fast and efficient service and follow through. Whether you are searching for the home of your dreams, or thinking of selling it, Blaine can turn your dreams into reality! Behind Blaine is the strength and stability of the Central Marin office of Frank Howard Allen, the #1 office of the #1 Brokerage in Marin County.

Contact him today at 415.925.3279 or click here.

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