The following is how a lender determines what interest rate and fees you will pay when applying for a home loan.
Here is why your interest and fees may be different than you what you saw in the news. How rates and risk based pricing affects your loan….
Mortgage Ads & The Media
More from Healdsburg Patch
When you see ultra attractive loan offers or hear the media touting the latest development in interest rates, take it with a grain of salt. Lenders price your loan with adjustments commensurate with the risk Fannie Max & Freddie Mac set. Always remember to read the fine print.
Here are most common margin adjustments lenders, banks, brokers and use to provide a rate and fee offer:
- your specific middle credit score
- your loan to value
- your loan size
- your loan term
- your loan product
- your lock time frame
- your occupancy
- your purpose
- your property type
When you go to apply for a mortgage or request a rate quote. the mortgage company’s pricing and rate will be reflective of these nine pricing adjustments.
The more risky your loan is the more loan level pricing adjustments come into play (layers of cost as a function of lender’s risk) which can make the pricing and rate much different than the national average mortgage rate you’ll see or hear about in the news.
For example on Freddie Mac.com, the average national 30 year fixed rate mortgage as of August 8, is 3.91% with .6 in discount points. Let’s say for example your loan scenario looks like this:
- your credit score is 700
- your loan-to-value is 80%
- your loan size is 418,000
- conforming 30 year fixed rate
- 30 day rate lock
- $40,000 cash out
- single-family home
- primary residence
The following pricing adjustments would apply:
- credit score > 760
- 80% loan to value
- loan amount > 417,000
- cash out
It would not be uncommon to see a scenario like this containing a rate at 4.125% with .5% in discount points for example.
* It is always optimal to review mortgage rates based on the national average rather than comparing countless lenders. The reason being is because the national average rate from Freddie Mac.com already takes into consideration the overall aggregated mortgage market in terms of rates and points anyway.
How Mortgage Pricing Moves With Economic News
Mortgage bond prices move in the form of basis points.
Quick lesson in finance- 100 basis points equals 1%.
Certain economic factors change the direction of stocks and bonds, things like domestic and worldly happenings and more specific indicators e.g. jobs report,
retail sales data, consumer confidence, Federal Reserve meetings to name a few (there are many more).
On any given day the market is negative, unchanged or improved in the form of basis points. If you have your eyes on 4% mortgage with no points on a 30yr fixed rate after the lender takes into consideration all of pricing adjustments, and you’re hoping for something better by floating your interest rate i.e. not locking in, and the market worsens 25 basis points, your 4% rate would still be available, but it would come at a cost of 25 basis points of your loan amount. If you’re looking at a loan of $400,000 that’s $1000 in the form of a discount point based solely on market forces. Such a change would come in a closing item in the form of discount point.
If the market improves by .25% and you’re looking at that 4% interest rate, now the 25 basis point is a credit towards fees.
The higher the rate you choose to pay the lower the fee tied to that specific rate chosen or credit towards fees applies. Conversely, the lower the rate you select, called no points. where no lender credit is awarded, but here is not also no points paid either, is a very popular middle of the road option as many opt for.
Market Timing Is Hindsight
There no such thing as a nonprofit mortgage lender. All mortgage companies regardless of brokers, banks, credit unions any financial entity that offers mortgage loans have a profit motive.
Securing the lowest possible interest rate is impossible because you’ll never be able to borrow money at the lender’s cost of funds, ever. Moreover, there is no way to time the market, all you and your lender can do is make an educated decision about the rate and the pricing tied to your mortgage transaction in lockstep with the market.
Generally, mortgage companies are going to be priced out in close proximity to each other on any given day as lenders have to be competitive just to be in business as a profitable entities, expect .125 to .25% in rate amongst loan providers. It is up you as an informed consumer to choose the mortgage professional/company whom you feel will best give you a competitive rate and pricing for your specific scenario.
The number one separator between companies/loan originators that goes far beyond rate and pricing is service. Unless you have the capacity to watch rates, pricing trends and compare various lenders daily leave it to professional. Working with an experienced mortgage loan originator who has their finger on the pulse of what’s going on with mortgage rates on any given day can properly advise you about locking in particular rate of interest and pricing, you desire is a safe bet.