Mortgage Lenders Can Negotiate Your Rate
When you shop mortgage lenders for current mortgage rates, how do they determine what rates to quote you?
Mortgage loan agents typically get daily rate sheets from their secondary marketing department or from “wholesale’ other lenders. These mortgage rate sheets are not for public view, because they show the price of a loan before the retail mark-up, similar to how retail stores buy and sell goods.
Example of Rate Sheet Pricing for a Fixed Mortgage:
* 5.500% – (1.000) * 5.375% – (0.750) * 5.250% – (0.250) * 5.125% – 0.000 * 5.000% – 0.250 * 4.875% – 0.500
This example shows mortgage rates corresponding to the cost of the rate expressed in terms of “basis points”. One point is equal to one percent of the loan amount.
Wholesale Mortgage Pricing
The above rates with numbers in parenthesis next to them indicate “rebate” points paid to the lender for selling a loan at a premium. The rates without numbers in parenthesis show the lender’s “cost” to sell a loan at that particular interest rate. The rate with corresponding zeros is the “par” price, which means the lender incurs no cost and they receive no rebate points for that interest rate.
Increased mortgage rates have lower short term costs because the loan holder will earn more in interest over the life of the loan, rather than points paid up-front. Conversely, lower rates have a higher up-front cost because the mortgage holder earns less interest over the term of the loan.
Retail Mortgage Rate Pricing
In order to quote a specific interest rate, a loan officer has to add points to the rate sheet pricing, which is essentially the lender’s profit. The lender normally sets a policy on the minimum and maximum points the loan officer adds to the rate sheet cost. The loan officer has the flexibility to price a loan within the allowable range. Most loan officers are paid on commission, which is usually based on a “split” of the points divided between them and the lender.
Lenders usually have a policy to charge a minimum of one point and a maximum of two points per loan, so the loan agent has the ability to negotiate mortgage rates according to how competitive they need to be. Based on the rate sheet pricing above, the retail cost of a 5.125% rate may be one to two points, while 5.5% may have a cost of zero to one point.
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