Minneapolis, MN: I get it. You are buying a new home, or refinancing your existing home mortgage, and are looking for the best mortgage interest rate. But buyer beware, the internet is full of places to avoid. So here I’ll give a little primer on the process, along with some common lender games, and show you why smart mortgage shoppers don’t get burned, and other do.
BASICS OF MORTGAGE LOANS
The most important shopping tool is to understand how the mortgages work, from mortgage interest rates to closing costs.
First, we all underwrite to the same guidelines. FHA loans are FHA loans, VA loans are VA loans, and conforming conventional fixed rate loans are conforming fixed rate loans regardless of where you get the loan. So one lender over the next is meaningless in terms of the vast majority of loan approvals. Conforming conventional loan means the loan is underwritten to Fannie Mae or Freddie Mac guidelines. Conventional loan just means it is not a government backed loan.
So technically all lenders are equal – but they are not. There is something known as individual lender overlays. This is where some lenders add they own additional rules to the standard guidelines. The most common overlay is a credit score overlay. For example, FHA rules say lenders can offer the small 3.50% down payment of an FHA loan all the way down to a 580 credit score, but because of risk, many lenders will not go below a 620 credit score. So if you are a weak 585 credit score FHA loan client, one lender over another may make a difference.
MORTGAGE INTEREST RATES
Lenders don’t just make up interest rates. Calling around to a lot is just a waste of time, when shopping just a few is all that is needed to give you an idea of where the real rate market is currently at.
Mortgage interest rates are determined by one item, the mortgage backed security market. All lenders base daily rates off the exact same MBS bond market on the same day at the same time. If my rates go up, so does everyone else. If my rates go down, so does everyone else. There are many factors that go into determining how the mortgage backed securities move everyday. I’ll save that for a different article.
Just understand that essentially this means we all pay the same wholesale rate for the money, and the only real difference is the margins needed by different lenders.
So if all lenders start at the same point, its all about the margins. As one can expect, this means the most lean and mean company needs smaller margins, and therefore passes along the best real interest rates to consumers and still maintain a sustainable profit margin.
Fat companies, with too many layers of management, too much brick and mortar buildings to pay for, expensive all day everyday advertising, and even stadium naming rights all have to be paid for. The only way they can do that is to have higher margins, and those higher margins translate into higher mortgage interest rates for consumers.
LOAN CLOSING COSTS
This is another area of huge consumer confusion. ALL LENDERS essentially have the exact same closing costs! How mortgage lenders, banks, and mortgage brokers present that to you can vary greatly, leading to consumer confusion.
First part of understanding closing costs is understanding the biggest percentage of closing costs are not even the lender, but rather all the other parties involved. Appraiser, credit bureau, title companies, state taxes, county recording fees, pro-rated property taxes, home owners insurance, and more.
The actual lenders have costs too, which generally are loan origination, processing, and underwriting costs.
If you’ve done any mortgage shopping whatsoever, you’ve gotten plenty of different interest rate and closing costs quotes. When one lender has significantly high or lower rates, or higher or lower closing costs – it generally is just about presentation.
The lower the interest rate, the higher the closing cost. The lower the closing cost, the higher the interest rate.
A common difference is many lenders will quote a rate based on you paying all normal closing costs, plus the industry standard 1% loan origination fee. Many other lenders quote without charging a loan origination fee, giving the appearance of lower closing costs. Some going as far as making silly claims, like they don’t charge that, or they will waive it “just for you.”
But deep think about that. Loan origination goes to the lender to cover the cost of originating the loan, from Loan Officers, and a significant amount of back office staff, to rent, phones, and more. So you think they are working for free? Of course not.
Here is how it actually works.
On most days, paying or not paying loan origination up-front equates into a 1/4% rate difference on a conforming fixed rate loan. This can vary depending on the market, but holds true most days.
Assume this two different quote example:
Lender A) A quote of a 5% interest rate on a $200,000 loan, with 1% loan origination ($2,000).
Lender B) A quote of a 5.25% interest rate on a $200,000 loan, with no origination (appears to be a $2,000 savings, but rate is higher).
Neither one of those quotes are automatically good or bad. They are just options.
If you have the up-front money today, and you are going to be in the home a long time, paying loan origination and obtaining a lower interest rate is smart. On the other hand, if you are tight on cash today, opting for lower out-of-pocket costs today by taking the slightly higher interest rate may be a good option.
I always explain these rate and cost options to my clients, but I know many mortgage companies, mortgage brokers, and banks don’t. It’s your loan, your money, your payments… You pick what is best for you – but you have to know there are options.
MORTGAGE SHOPPING TIPS TO AVOID BEING FOOLED
The first tip is education. Reading this article has already made you smarter than most when shopping for a mortgage loan.
The rest of the tips include only using someone local. There is nothing on the internet you can’t get from the person down the street.
Avoid big banks and big internet companies with lots of overhead.
Statistically, using your local mortgage broker will always get you the best deals.
SCAM QUOTE EXAMPLES
While it is better today that it was years 15-years ago, the market is still ripe with slight of hand quoting. I’ll give two recent example I’ve run across.
Example 1) Client was shopping standard 30-year fixed rates. Client was quoted an interest rate a full 1/2% lower than my fixed rate quote, along with no loan origination costs. Knowing that was completely impossible, but digging deeper, we discovered the other lender was actually offering a 5-year adjustable loan, but he kept saying “it’s a 30-year loan.” Clients mind kept hearing 30-yr fixed, when it clearly wasn’t!
Example 2) A well know big internet lenders who is pretty Quick, and has Rockets. Client was looking on their web site at posted interest rates, which looked competitive to mine. Being down this road many times before, I had the client go back to their web site, but this time scroll down to the rate disclaimers. Here I showed him that while they showed the same physical interest rate, it clearly showed that to get that rate from them assumed a 75% loan-to-value loan (25% down), and would cost an additional 2.125% in points. Each point is 1% of the loan amount. So with the “same” mortgage interest rate, their closing costs were 2.125% HIGHER than mine.
DON’T GET BURNED BY THE SMALL PRINT!
We lend in Minnesota, Wisconsin, and South Dakota – and we’d love to be your lender. Call (651) 552-3681, or just apply online at https://joemetzler.com/application. NMLS274132. Not an offer to enter into an interest rate lock agreement. Not everyone will qualify. Equal Housing Lender.