Spoiler Alert! – no one gets the lowest interest rate “on purpose.”
Predicting mortgage rates, or finding the lowest, is like a dog chasing its tail. Impossible to catch, right?
You’d have to be able to accurately predict the stock market and other economic indicators. Then you’d have to look at what ALL LENDERS are offering at the SAME TIME of day.
If you can do this you must STOP reading this right now. Whatever your job is; you are under paid. Go directly to Wall Street and get rich!
The Good News is with a little work; you can find a lender that is offering a competitive rate.
I want to put you in the Power Seat. Let’s get started!
Let’s first look at how home loan rates are determined.
Mortgage Interest Rates are based on several key components. I’m going to keep this very BASIC.
Bottom line – it’s business and businesses like (and need) profits.
We have two major players
A mortgage lender is like any other business. They have their own set of goals and criteria for profit.
- They occasionally need a new influx of business and are willing to undercut the marketplace for a period of time. Alender may have a low overhead and be able to charge less. You most often see this with online lenders. Their business model is typically low cost and high volume.
- A lender may be a bank and that new mortgage client brings additional profit from cross selling them into other products such as checking, money market accounts, car loans, etc. It is possible then that they can lessen their need for profit on that mortgage transaction
- And, of course, there are the lenders that just know how to run a profitable business; which gives them more flexibility when it comes to setting a competitive interest rate.
There is another major player in the mortgage profit game and that is the Investor who buys the mortgage from a lender. (the lender takes the proceeds from selling the mortgage to make more loans)
A mortgage is something that has value for a lender to sell to an investor.
[it’s definitely more complex as mortgage paper can be bought & sold multiple times and in several different methods [called the Secondary Market]
I’m going to break this down with a very basic illustration.
When mortgages are sold; they are called mortgage backed securities (MBS). MBS is historically thought of as a safer investment vehicle.
If the stock market is hot; investors may move their money to stocks. Conversely, when the stock market is tanking; a safer investment of a mortgage may be the best move.
This movement of investor money happens on not just a daily basis but throughout the day.
I’ve seen lenders revise their rates up to five times… in that one day!
Are you beginning to see the complexity of finding the lender with the lowest rate?
To make it a bit more complicated; there is always more than one interest rate available at a lender.
It just depends on how much you are willing to pay for it.
Have you ever heard the term “Points?”
Points are nothing more than a fee paid to get a lower rate with your lender. (a percentage based on the loan amount)
In the illustrations below; we are assuming the current interest rate that an investor needs is 5.0%.
Notice how it affects the buyer when the rate is offered at a higher amount?
Homebuyer gets 5.0% and pays a 3% loan fee (discount points).
Homebuyer gets 5.25% and pays a 1% loan fee (discount points).
Homebuyer gets 5.50% and pays a NO loan fee (discount points).
Now you know …
- How mortgage rates are set
- How they fluctuate and
- How there are many options at the same lender
Let’s now look at how YOU will affect the interest rate.
After all, you should know what you are shopping for, yes?
How will you affect the interest rate?
- Credit History (your credit score)
- Down Payment Amount
- Type of Property
That “magic number” known as your CREDIT SCORE has such Power!
A lender has a pre-determined tier of credit scores. It is that tier that determines how much that mortgage will cost you in interest rate and/or fees.
It can also influence the cost of your mortgage insurance if you are making less than a 20% down payment.
DOWN PAYMENT amount influences interest rate AND the loan program.
As always – money talks, right?
More down payment can result in better interest rate and less expensive loan programs.
The TYPE OF PROPERTY you are buying can directly affect the interest rate.
- New Construction
- Multiple Units (duplex, triplex, fourplex)
You may now be thinking “Good information; but how do I shop lenders BEFORE I know my credit score, loan program and property type?”
Determine a basic scenario and give each lender the same information.
- My credit score is 720
- I have a 10% down payment
- I want a 30 year fixed rate on a conventional mortgage and also an FHA mortgage.
- I am buying a house (not condo, multi family, manufactured, etc.)
I’d recommend contacting two or three lenders maximum to avoid ANALYSIS PARALYSIS.
Start with your bank or credit union (unless you’re not happy with them!). Choose a mortgage company and then a mortgage broker.
What’s a bank vs mortgage company vs mortgage broker? Read All Lenders are NOT Created Equal!
Here’s Something You’ll REALLY Like!
I’ve created a Preliminary Lender Shopping Checklist for you and I’d like you to have it, FREE.
First, go here and request it.
Like I said, there’s no cost.
So if you’d like to start the journey of finding a competitive lender offering great rates, get this Lender Shopping Checklist now.
Video: How To Use This Worksheet
Recommendation: Also check out this post titled “All Lenders Are NOT Created Equal!”
Thanks for reading this article. Your comments below are encouraged and appreciated!