Sep 12, 2017

I'm going to tell you a secret:  For most mortgage loans, different lenders have similar interest rates.

Why?  Individual banks and mortgage companies don't determine interest rates every day.  The secondary market does.

So my interest rate for a Fannie Mae 30-year fixed rate mortgage should be pretty similar to the bank down the street and the credit union across town for the same loan.  There are exceptions, which I'll tell you about in a sec.

Nevertheless, you have many lenders to choose from.  How do you make sure you're getting the best interest rate possible?

Read the small print.
You've probably heard that interest rates change every day.  It's not actually the interest rates that change.  It's the cost of getting a particular interest rate.

Let's assume that today you could get a 4.25% interest rate with no points.  Tomorrow the same interest rate might cost 0.25%.  Or 1.0%.

It also works in the opposite direction.  Instead of paying extra to get a lower rate, you could receive a lender credit for choosing a higher rate.  When you see lenders offering "no cost" refinances, that is how they do it.  They charge a higher interest rate and use the credit to pay your closing costs.

Check out the example below.  Interest rate options on any given day could look like this for a $240,000 loan amount.

Mortgage Interest Rates and Points
Note: These are examples of interest rates for illustrative purposes only. They are not indicative of the actual interest rates available on any particular day.

In the example above, is it worth it to pay $4,800 to get an interest rate that saves you $52/month on your payment?  If you're short on closing costs, is it wise to pay $17/month more in exchange for a lender credit of $1,200?

Sometimes, when you see an uber low interest rate advertised, it's because it comes with a bunch of points.  Read the small print!

Small print for a mortgage interest rate advertisement.
On 09/12/2017, Quicken Loans was advertising an interest rate of 3.75% with 2.125% in points. On a $240,000 loan, that is over $5,000 in points just for the interest rate!

If it sounds too good to be true, it probably is.
What if you were shopping for a car instead of a mortgage?  You've shopped online.  You've done your research.  And you know a fair value for the car you're interested in is $23,000. 

So you go to three dealerships and they all quote you between $22,600 and $23,900 for the car.  At the fourth dealership, they offer to sell you the same car for $15,000.  What would you think?

This is where you say, "I'd think something was wrong with the car!"

Exactly!  Maybe the car has been in an accident.  Maybe there is a mechanical problem.  You'd be skeptical, right?

Shop for mortgage interest rates like you shop for a car.

Use the same skepticism when shopping for a mortgage loan.  If four different lenders quote you interest rates between 3.75% and 4.0% for the same price (points), and lender number five quotes you 2.5%, something is probably wrong.  That lender may charge more points, the loan could be an adjustable rate, or they might tack on lock extension fees at the end.

Check the expiration date!
Interest rates are locked for specific periods of time - usually 30, 45 or 60 days.  The longer the lock, the greater the cost.  Make sure your interest rate lock doesn't expire before your closing date.  What happens if you need more time?  Can your lock be extended?  What is the cost for extending?  And who covers that cost - the lender or you?

Don't throw the baby out with the bathwater.
Don't get so consumed with your interest rate that you ignore other potential red flags.  It doesn't matter if your lender is offering you an interest rate that is 0.25% less than the competition if he won't return your calls and can't get your loan closed on time.

Don't be afraid to negotiate!
Really want to work with Acme Mortgage but think you could get a better deal at Loans-R-Us?  Get a written estimate from the competition, and see if Acme can beat it.

Be mindful of risk based pricing.
Interest rates also depend on something called risk based pricing.  Essentially, the GSEs (Fannie, Freddie, and government entities) charge more for riskier loans.  For instance, someone with a credit score of 620 might pay 2.5% (of the loan amount) more for the same interest rate than someone with a 740 credit score.  A person buying an investment property will pay more for the same interest rate than someone who is purchasing a primary residence.

Make sure your lender has a realistic picture of your specific scenario including property type, credit score, occupancy and down payment.  You're not doing yourself any favors if your lender is quoting you an interest rate for a stick built home and you plan to purchase a manufactured home.

For the most part, this risk based pricing is determined by the GSEs.  So everyone should be using the same "price adds."  Fannie Mae decided that an interest rate for an investment property is 2.125% more than the same interest rate for a primary residence - not the individual lender.

The valet parking of mortgage lending
But can't you get the best interest rate somewhere on the Interwebs?  Maybe.  But you also get what you pay for.

I am the valet parking of mortgage lending.  I drive the car.  I'll give you directions to the venue.  I'll hold the door for you.  And I'll recommend a restaurant nearby.  I am a professional and this is my career.

I am the valet parking of mortgage lending.

Calling an 800-number or working with an internet lender is the equivalent of self-parking.  You can risk it if you're up for it!  But you'll have to drive around the block several times.  Your car will get a little banged up.  And you'll be ten minutes late for your event.

What are the exceptions?
I said that most loans have similar interest rates.  That is correct for loans that are sold on the secondary market (Fannie Mae, Freddie Mac, and government loans).

All of that flies out the window when we're talking about non-saleable mortgages:  jumbo loans, home equity lines of credit, land loans, and construction loans.  Why?  Because when we're talking about FHA loans, we're all selling the same product.  (With a few exceptions) my FHA loan looks like the FHA loan from the lender down the street.  And I'm going to sell my FHA loan on the secondary market just like the lender down the street.

Non-saleable loans are held in a lender's portfolio.  Therefore, the lender can have any guidelines and rules they want.  And they can charge any interest rate they want.  Bank A might charge 4.5% for their home equity line of credit.  And Bank B might charge 6.5%.  For non-saleable loans, it really pays to shop around!