Shopping Mortgage Rates

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There are two important items to state up front.

 

1) Mortgage rates change daily. Make sure you compare rates at the same time, on the same day, on the same loan program, with the same number of points. Rates may change until they are locked by the lender. Lenders normally collect money for the appraisal when they lock your rate.

 

2) Keep in mind that lenders only control the 800 section of the Good Faith Estimate. They may have $0 for Attorney fees or Taxes on the GFE, but do you really think an attorney will work for free? Or that the lender will talk your local government into waiving your taxes? And beware of blanks. Surprises are not good at closing.


Lenders have access to generally the same rates on any given day. However, different lenders may price differently on any given day. Each day, each lender produces a rate sheet. These rate sheets are not for the public to view. They are for Loan Officers because they disclose the profit, or cost, for each loan rate.

 

You may have heard of discount points - buying down the rate. What most lenders don't tell you is that by selling you a higher rate, they earn extra money, called Yield Spread. The rate that costs nothing to you, and pays the lender $0, is called the Par Rate. If you pay the normal 1% origination point, and get the Par rate - you've done well in your loan shopping.

 

Below is a sample of one section of a rate sheet for 30 Year fixed rate loans. This rate sheet shows the interest rate and the cost (or profit) for each interest rate. The profit is expressed in points. Each point is 1% of the loan amount.

 

Rate Cost
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)

 

As you can see, a good deal would be 6.75% paying a 1% origination fee. A "no-point" loan would price out at 7.00% using this rate sheet. Paying 1% discount, and 1% origination would get you a 6.5% rate.

 

Or, you could ask for a reduced cost or no closing cost mortgage, and in that case the lender would most likely quote a rate of 7.25% and credit .875% of your loan amount towards the closing costs.

 

The higher the rate, the less it costs you, because the lender is making more in interest over the life of the loan.

 

Reminder: When shopping, be careful. Shop at the same time, compare apples to apples, and of course check out your lender with the Better Business Bureau!