How do Rates work?
A mortgage is the largest and most complex transaction ever considered for most people.
It's important to understand all the details, and understanding rates are an important part.
Let's start off by looking at the history of rates. For 70 years everyone was offered the same rate if they qualified for a conventional mortgage on a given day. You could look up rates in the Sunday paper, doesn't that sound nice. That's because the government considered it discriminatory to give one person who qualified for a mortgage a different rate than someone else who also qualified for a mortgage. If you didn't qualify then sub-prime lending could still be an option which had terms, rates, and fees that were less than ideal.
Fast forward to Sept. 6th 2008.
With the housing crisis in full bloom, the government placed both Fannie Mae (FNMA) & Freddie Mac (FMAC) into conservator-ship, and under the control and discretion of the U.S. Department of Treasury. With the government now in charge, it suddenly wasn't discriminatory to give 2 different qualifying home buyers different rates. Now it was smart business!
And so Loan Level Pricing Adjustments were born (LLPA) !
First, what is a LLPA? It's a matrix that is provided by FNMA & FMAC that assesses risk based on criteria related to your home financing.
There are over 25 different adjustments that determine each persons rate so it can get a little complex. For most loan products the amount of your down payment and credit score can vastly effect the final rate but there are many other adjustments that must be weighed before a final interest rate can be determined.
Understanding the impact of these details...
If you were the sales manager of ABC bank, how would you answer the question, "What is your rate today?"
What's your rate? As you can see it's a difficult question to answer without all of the details.
For us it's a lose/lose situation. Our goal is to provide you the best home finance experience ever so if we assume best case rate adjustments (which is a common practice when you are shopping rates) then we take a chance on the actual rate being worse than quoted once the correct adjustments are applied and you feel like we've lured you into a bait and switch situation. We never want that.
If we play it safe then we take a chance on the rate actually being better than we quoted you initially. Maybe your adjustments are really low based on your actual situation. It's likely we won't get the chance to have the follow up conversation with you because we quoted a higher rate (just to be safe) and other lenders probably quoted lower regardless of accuracy.
It's human nature to go with the lowest price. But by understanding how rates work you can
avoid a potential "good deal" only to find out it's not accurate and it's too late to turn back.
For us it's important to be your adviser, your friend in the mortgage business, your source for accurate information. We want to discuss rates, how they work, what options you have, how each option affects you both short term and long term and together pick a path that puts you in the best situation for success!
If this sounds like a good way to move forward for you give us a call!
To get the best rates first you have to understand when and why do rates change? There is all kinds of mis-information about how rates move based on the treasury note, the fed rate, the stock market, etc. But in the end mortgage rates rise and fall based on Mortgage Backed Securities (MBS). Everything else has an indirect effect on rates. For example: if the stock market is doing well, demand for MBS may be lower and therefore require the yield to be raised to attract more buyers. But the stock market doing well isn't a guarantee that the MBS market will do poorly.
MBS are a type of bond issued to the market, made up of groups of mortgage loans with a specific rate and term. They are bought and sold just like a stock and they have a direct correlation to interest rates. Meaning as the price of MBS goes up and demand is high then the yield/interest rate goes down. On the same note, as investors sell MBS, the price goes down, creating a higher yield to attract buyers and causing interest rates to go up. Just like the stock market, MBS can be volatile and difficult to predict if rates will be better or worse at any given time.
When it's time to lock your rate most people don't know that the rate lock attaches to both you as well as to the property. So you typically are not eligible to lock a rate until you are under contract for the purchase of the home and if you change properties the initial rate lock is lost and you must re-lock. In a refinance this won't apply since the property is already identified.
It's a bit of a trick question. We want to give you the best rate between the purchase of your new home and your close date. We do this by monitoring the MBS market as well as market expert commentary to give me an edge when it comes to determining the most optimal day to catch rates at their lowest. Ultimately it is the home-buyers decision on when to lock but I'll be there to advise you and explain what the market is doing and what our odds are that the rates will either increase or decrease.
Given the choice...
Would you rather have the lowest rate today? Or the lowest rate on the day you close?
We'll look to give you the edge when it comes to making the decision of when to lock and get the best rate!
If you have any questions about how rates work or want to discuss a
rate strategy specific to your needs just give us a call.
What are points?
Another option to get the best rate and lower your monthly payment is with points. There is a cost to buy points and they may not be the best option for you depending on your overall goals and priorities.
Before we get into the details take a guess regarding the answer below and we'll refer back to it in a minute.
To keep it easy, lets say the final loan amount is $200,000. $250k purchase with 20% down = $200k
Remember your answer...
If you lowered your rate by .250%, how much do you think it would lower your monthly payment?
When we look at buying down points several things will need to be discussed and reviewed and in many situations buying down the rate with points doesn't make sense. The cost of the rate buy-down can vary based on the market but the average is a cost of 1% of the loan amount for a reduction of .25% of the rate.
In a similar fashion, the home-buyer could also go up in
rate to 4.50% and could receive a credit back of 1 point or $2,000.
Looking at this chart if a home-buyers rate, based on LLPA's was at 4.25% then it may cost 1% ($2,000) to buy that rate down to 4.00% and 2 points or 2% ($4,000) to buy it down to 3.750%.
Do you remember your answer on how much the .250% would lower your monthly payment per month?
The most common answer I get is $200 per month but it varies from person to person but most people are shocked at the actual answer.
Based on our loan amount of $200,000 the actual savings per month if you were to buy down the rate by .250% is right around $30 per month.
The big question...
Would you be willing to spend $2,000 to save $30 per month?
No need to answer that question now. This is something we would go over together and it really depends on several things like cash flow, how long you will be in the home vs. the cost to recoup that investment. All questions we discuss together when we put together your strategic mortgage plan and ultimately the decision is always yours to make but I'll always point out the pro's and the con's to each option.