Why your bank isn’t offering you the best mortgage rate
Mortgage rates are near their all-time low, and it might be hard to imagine they are going down even more. But some lending experts say many banks don’t give borrowers the lowest rates they deserve.
It’s about how banks price mortgages: a complicated mix of lending that is attractive to potential investors – often government-backed buyers like Fannie Mae and Freddie Mac – protecting profit margins for money. higher interest rates to come, and balancing the demand for loans with available staff. By managing these variables, lenders can have more money to make loans, while remaining profitable and competitive.
Of all the factors that affect your mortgage interest rate, most are beyond your control – but there are two you can influence to tip the best odds in your favor.
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Investors determine prices
“Mortgage rates are not so much dictated by the banks as they are by the investors who buy these loans,” says Anthony Davenport, a former mortgage originator, now a credit management consultant and founder of Regal Financial in New York. And Davenport says 90% of mortgages are currently bought in the secondary market by Fannie Mae, Freddie Mac or the Federal Housing Administration.
Lenders want to sell their loans to free up more capital to lend and remove the risk of borrowers defaulting on their books, so they price their mortgages at the rates and terms at which these quasi-government investors will buy them.
Pricing loans now for a rate hike later
The mortgage industry has become so competitive that lenders have little leeway or desire to inflate interest rates, says Eric Smith, another former mortgage originator and banking manager, now a literacy coach. financial in Atlanta. The only exception, says Smith, could be large mortgages that lenders often keep on their books.
These mortgages, known as “jumbo loans” and in 2021, typically exceed $ 548,250 in most parts of the country, exceed the size limits set by Fannie and Freddie. For this reason, they are not bought by these government sponsored entities, so lenders usually keep these loans, as well as the relationship with the affluent customers who take them out.
Holding a jumbo loan portfolio and worried that interest rates could rise, lenders could [mortgage] price a bit to protect itself when short-term rates start to rise. “This helps protect their profit margin on low-interest loans,” Smith says.
Davenport adds that, for jumbo loans held by banks, “in many cases they borrow money from places like the Federal Reserve at 0.25-0.50% and don’t pass savings on to customers. “.
Shmuel Shayowitz, president of Approved Funding in River Edge, New Jersey, says there are two other cases where banks can hedge rates a bit. Sometimes lenders wait to be sure that a lower rate will stay stable and not immediately rebound, he says. This would leave the bank with a locked in rate for a customer that is lower than the rate currently in effect.
Other times, it may be an effort to manage mortgage demand in order to clear a backlog of loans without adding manpower to handle additional volume, Shayowitz says.
Two ways to get a rate cut
While there is little – do nothing – you can do about bank profit margins or how Fannie and Freddie shape lender prices, Davenport says there are other instances where a borrower may not get the best rate he or she can get, and sometimes a tactical move or two can make a difference.
First, mortgage rates vary based on a borrower’s FICO score and, he says, this is where interest rate adjustments are very real.
“Someone who has a score of 740 isn’t really likely to default any more than someone who has a score of 760, but they will pay a higher interest rate,” Davenport says.
Knowledge where price breaks fall on the FICO score scale can help a borrower get a big discount. For example, if a lender’s discount reaches a credit score of 700 and yours is 680, you may decide to reduce a credit card balance enough to take your score to the next level.
Second, Smith says consumers looking to get the best mortgage interest rate should buy more than one lender and – since lenders are likely to come up with a rate with lower mortgage rates. reduction points integrated – “get a rate based on zero point of discount”.