It occurred to me a bit ago that most people have no idea how mortgage rates really work…so today, I am going to preach a little #TRUTH that consumers need to know! This is lengthy, but I promise you I will teach you something.
First thing that you need to know…and I am actually going to talk about this on the morning shows next week about this bit: When you hear about, “The Fed Cutting the Rates” this does NOT mean that the Feds are cutting mortgage interest rates. What they are talking about are the short term rates in which banks lend to each other, credit cards etc. On the last rate cut, I literally got 348237426325 texts and emails from my customers wanting me to lower their interest rates by .25% that I actually made one of those “canned” responses via text so that all I had to do was type “bbb” and my whole dissertation about rates would come up as a response.
So, what’s the REAL answer? Well, read on…because it is more in-depth than you think!!
Reason #1: Mortgage Backed Securities
At its most raw level, mortgage interest rates are based on Mortgage Backed Securities (MBS), which are bonds. We typically look at the FNMA (conventional) and GNMA (government) bonds. How well these guys do on a minute by minute basis determines where rates are headed. They USUALLY work opposite of the stock market…so when the stock market does well, the bond market suffers and vice versa. We start to see rate and pricing movement either up or down when the bonds are either up or down 50-ish bps an any given basis. When the MBS bond market is down, then pricing is worse and vice versa.
A way to better understand the concept is that when the economy is doing well and booming, people are going to invest in stocks. Stuff becomes more expensive…homes, goods, transportation, services. Inflation…the “arch enemy” of mortgage interest rates…is prevalent, rates are higher.
When we have economic crisis (war, high unemployment and things like that), mortgage interest rates are lower.
Bottom line: If you are a consumer, watch the stock market because GENERALLY (MOST TIMES) it is a good indictor of how things are going mortgage rate-wise. No one can truly predict where rates are going to go no matter how much they think they can (Case and point: This year…we were supposed to be in a rising rate environment. Well heck, that didn’t happen!) No one has the crystal ball because we cannot predict what will happen in the world. We can just watch it on a daily basis and speculate. Hope that makes sense.
NOW…the other parts that you do not know…the “secrets” of rates…
Reason #2: Pay
Before 2011, when us Loan Officers weren’t regulated, we theoretically could charge you whatever we wanted on a rate. If you were a friend or family and we just wanted to get you your loan for cheap, we could charge you the minimum and make less. If your loan was hard, or if you were dealing with an unethical or greedy Loan Officer, we could charge you a higher interest rate and make a ton of money off of your loan. Kinda crap, right? I am glad those days are gone because it got rid of a lot of unscrupulous people in our industry.
In 2011, we got regulated. ALL mortgage companies and banks had to decide exactly how much they were going to pay their Loan Officers company-wide and it had to be “set” when it comes to the rates that followed. Pay was no longer separate from rate. A Loan Officer could no longer make more money on one person than another or make more on one loan type than another. How this was never in place from the beginning, I don’t know. I am glad it changed though because lots of people were getting ripped off and they didn’t even know it.
Bank A pays their Loan Officers 1% on every loan that is closed. The Loan Officers no have no incentive to push clients from one product to another (because we used to make more money on different types of loans which was totally unfair to a consumer…hence the regulation). Therefore, their interest rates that they offer as a bank as a whole reflect the profitability built into their pricing to include the LO making 1% on every loan. So, for example, their rate on a conventional loan would be 3.75%.
Bank B pays their Loan Officers 1.75% on every loan. Their rate is 4.25% for the very same loan because of the profit margin that has to be built in.
Now, I am NOT saying here that you should just go with the cheapest place. That is a BAD idea. There are things that a good Loan Officer does that adds WAY more value than saving $500 bucks. Not only should you shop for a home loan, but even more importantly, you should shop for the BEST Loan Officer. This person can make or break your entire transaction. Different between “rainbows and butterflies” and an absolute nightmare. You want to choose someone who has experience, has a good reputation and who, most importantly – you trust.
Reason #3: Overhead
Besides basic LO pay, a consumer needs to know that the rates they are being charged by a mortgage company/bank also is in direct correlation with all of the other “stuff” they do and people that work there.
For example, there is a company that we see on TV every day that spends MILLIONS on advertising their “Rocket” mortgage…and people flock to that because, honestly, people believe what they see on TV. BUT what you don’t know is that allllllll of that advertising…guess what?? YOU pay for it. Their rates are HORRIBLE compared to most everyone else.
Today, online they advertise 3.75% on a 30 year fixed. BUT, no one looks at the small print!! Their “disclaimer” at the bottom that no one seems to scroll to says, ” 30-Year Fixed-Rate Mortgage:
The payment on a $200,000 30-year Fixed-Rate Loan at 3.75% and 74.91% loan-to-value (LTV) is $926.24 with 2.25 points due at closing. The Annual Percentage Rate (APR) is 4.035%. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply.”