Interest rates are already on the rise in 2010 and the expectation is that will not only continue but potentially explode after the Federal Reserve stops buying mortgage backed securities in March. No matter what is happening with rates on a daily or weekly basis it’s always important to know some tips on how to get a lower mortgage rate. In order for this to make sense let me first give you a basic idea of how the mortgage industry works and how compensation is earned.
On a daily basis mortgage originators, whether they are direct lenders themselves or brokers who originate loans to a wholesaler, have rate sheets listing loan products, rates for those products and prices or rebates for each rate. Those prices/rebates are part of how compensation is earned in the mortgage industry, the other being direct fees that are charged (“points, origination, processing, etc.). Higher rates pay more in rebate while lower rates cost more in discount. In the middle is what’s called the “par” rate.
- For example if the “par rate” for a 30 Year Fixed Loan is 4.875% on a particular day then it’s likely that 5% would have a rebate being paid to the originator while 4.75% would have a cost (loan discount) in order to obtain.
Since most loan originators have to make money on the loan they will generate their compensation around this. If a borrower wants a loan with lower fees then it will likely result in a higher rate so that the originator is compensated. If a borrower wants a loan with higher fees and a lower rate, they may be offerred a “par” rate or perhaps a rate below par with costs included for loan discount (buying the rate down).
When a borrower has the intention of getting a lower rate or one that is below par it’s not unusual to see loan quotes that include both origination related fees plus loan discount costs. That can get quite pricey and means more dollars coming out of your pocket.
So how can you save on paying extra fees AND get a lower mortgage rate?
First off you need a loan originator or lender that isn’t going to pull a fast one on you by charging more fees than it takes to get that lower rate. The newly created 2010 Good Faith Estimate helps to show you more details about how much you’re being charged for a loan but not all lenders disclose on it equally (that’s a whole other blog post about deciphering the new GFE version). Make sure your originator is disclosing to you how much you’re paying to buy the rate down vs. how much you’re paying them directly!
A key question is looking at the total fees that you’re paying whether it’s loan discount, loan origination, points, etc. and how much of an improvement you’re getting in an interest rate for those extra fees vs. a “par” rate loan. If it makes sense and the amount your saving from the lower interest rate outweighs the extra fees you’re in great shape.
Although if you really want to get the ultimate combination of lowest rate and lowest fees on a purchase loan you need to work with a Loan Originator, such as myself, who is also a Realtor and whose goal isn’t necessarily to make money off your loan but to get you the lowest rate with the lowest fees.
How is that possible?
Simple, if I’m working with a client on both the real estate and mortgage aspects of their purchase transaction I get paid a commission by the seller of the property you buy. Therefore I don’t need to get paid on the mortgage side of the transaction and can pass along that lower rate/fee combo to my clients. Instead of charging origination fees, I typically will setup a loan at the “par” rate. Or I will set it up with discount fees to get the lowest rate possible BUT then have those costs paid for by the seller! So the borrower gets the lowest rate possible and doesn’t have to pay the fees that other lending sources charge to do so.
So that’s my tip or input on how to get a lower mortgage rate – Feel free to contact me with any questions you have about this and hopefully you’ll save on your next home loan!
Michael Pollock is an Accredited Buyers Representative, member of the Seattle King County Association of Realtors and Licensed Loan Originator in Washington. He also works with clients in the Tacoma/Pierce County area – visit EXP there at www.tacomapowersearch.com