Mortgage Loan Rates and Pricing |
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"What is your rate today?" prospective borrowers ask when they call up a mortgage loan lender shopping for rates. Well, there isn't just one rate. There is a choice of mortgage loan rates and the rates are very similar from one lender to the next, perhaps identical. A Mortgage Loan Officer's Rate Sheet Every morning a mortgage loan officer gets a rate sheet, or a number of them. Mortgage bankers get the rate sheet from their company. Mortgage brokers get rate sheets from a number of wholesale lenders. They come in across the fax machine, across the computer, or through various secure web sites requiring confidential user names and passwords. On volatile days, there may be revisions to the rate sheets. There have been times when rate sheets were revised more than five times in one day. These rate sheets are not designed for public view. They are for mortgage loan officers' eyes only because they represent the cost of a mortgage loan to the mortgage loan officer, not the cost to the borrower. Below is a sample of one section of a rate sheet for 30-year fixed rate mortgage loans. Rate Cost . . 6.250% 2.000 6.375% 1.500 6.500% 1.000 6.625% 0.500 6.750% 0.000 6.875% (.500) 7.000% (1.000) 7.125% (1.500) 7.250% (1.875) 7.375% (2.125) 7.500% (2.375) The rate sheet shows the interest rate and cost to the mortgage loan officer, expressed in points. One point is equal to 1% of the mortgage loan. Pricing the Mortgage Loan Different rates have different costs. Higher rates don't cost as much as lower rates. This is because the lender is going to earn more in interest over the life of the mortgage loan, so it makes sense to charge less. Conversely, it makes sense to charge more for a lower interest rate, because the lender will earn less interest over the long term. Zero points is called par pricing. Numbers in parentheses indicate premium or rebate pricing, meaning that instead of having a cost, money is actually paid back to the mortgage loan officer and the branch for originating a mortgage loan at that rate. Almost all mortgage loan officers are paid on commission. The amount earned by the mortgage loan officer and the branch is subject to a split--just like real estate agents. Part of it goes to the mortgage loan officer and part goes to the branch. Any fees that are not part of the points go to the branch (or company) and are not subject to the split. Quoting Rates to You Before quoting you an interest rate, the mortgage loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on how little that can be (the minimum amount the mortgage loan officer adds on to his cost) but does not want to overcharge borrowers either (so they set a maximum the mortgage loan officer can charge) Between that minimum and maximum, the mortgage loan officer has a great deal of flexibility. For example, say the mortgage loan officer decides he and his branch are going to earn one point. When you call and ask for a rate quote, he will add one point to the cost of the mortgage loan and quote you that rate. According to the rate sheet above, 7% will cost you zero points. 6.75% will cost you one point. In our example, at 7.125% the mortgage loan officer and branch would earn one point and have some money left over. This could be used to pay some of the fees (processing, documents, etc), which is how you get a no fees-no points mortgage. You just pay a higher interest rate. Asking the Seller to Pay Closing Costs: Rules and Advice It has become common to ask the seller to pay some or all of the closing costs when you purchase a home. Essentially, this is financing your closing costs since you will probably pay a little bit more for the property than you would if you were paying your own costs. Keep in mind a few simple rules. On conventional mortgage loans you can only ask the seller to pay non-recurring costs, not prepays or items to be paid in advance. If you are putting 10% down or more, the most the seller can contribute is 6% of the purchase price. If you are putting less down, the most the seller can contribute is 3%. It is wise for the seller to put a ceiling on the amount they will pay, just to make sure no one gets carried away. On FHA mortgage loans, you can also ask the seller to pay everything. However, the buyer must have a minimum 3% investment in the property, whether that is applied toward down payment, closing costs, or prepays. The 3% can be from their own pocket or a gift from a family member. |
