RATE SHOPPING TIPS
When shopping for the lowest price for most items we want to buy, we simply compare prices online and in stores, find the best value and buy it. When shopping for a low mortgage rate it is more complicated than that. Here are the reasons why it is complicated, and what you can do about it.
MORTGAGE RATES CHANGE OFTEN, SOMETIMES WITHIN THE SAME DAY
The most important thing to know about mortgage rates is that they are not stable. Like stock prices, they change with the Market. The fixed rate mortgage rates are heavily influenced by the Mortgage Backed Securities Market (MBS). Rates change often, sometimes during the day. So, if you get a quote in the morning from one lender, it may not be the same that afternoon.
Well, that’s frustrating! How can you ensure you are getting the best rate available for your loan profile?
Because rates change often based on the activity in the Bond Market, it is best to work with a loan officer who carefully watches the Market to find the best time to lock your rate.
I subscribe to MBS Highway for this purpose, but there are other services. If your loan officer doesn’t watch the Markets and you want to watch them for yourself, one resource available without a costly subscription is www.MortgageNewsDaily.com
BAIT-AND-SWITCH STILL OCCURS
Some people think they can trust a quote simply because it came from a major bank. There is one major nationwide bank who is well-known in the mortgage industry for bait-and-switch practices. I talked to former employees and learned that part of their compensation formula includes bringing loans in the door. They are paid more even if the loan is declined. That incentivizes them to lie just to get you to apply for a loan.
Don’t assume that a rate quoted over the phone or email is true. Quotes given in any format other than an official Loan Estimate are not legally binding.
There are the solutions I recommend:
The first and most important tip is to work with a loan officer you trust. If a friend or family member had a positive experience with a loan officer, then it is likely you will also.
If you are ready to lock the rate and move forward, then give them a completed loan application and allow them to run your credit. They can then open the loan, lock it, and issue a locked Loan Estimate (LE). That is legally binding.
Before loan estimates were legally binding, I created this form to help people shop for rates. It has a legally binding paragraph above the signature. This is useful when you want to shop around but are not able to lock the rate (e.g. you are not in escrow for your new home yet). It separates “the men from the boys” in that if the loan officer is lying, he will not sign the form.
As noted above, work with someone you can trust. If you are not certain whether you can trust them, ask to see their rate sheet or a screen shot of the automated system they use to price loans. If they show it to you, ask them to explain it. On most rate sheets a price of 99.00 means one-point cost for that rate; a price of 100.00 usually means no points cost. If they will not show you their rate sheet and explain it to you, I recommend choosing another loan officer. What is he or she hiding?
LENDERS CHANGE RATES FOR OTHER REASONS
There is one more aspect of rate shopping to consider. Banks and mortgage-only lenders often change their rates to control the flow of loans.
For example, if they have more loans than they can handle comfortably, then they will raise rates to slow the flow of loan applications. Conversely, if they need more loans, they may lower rates long enough to add more loans to their pipeline; and then increase them when they have enough. This is most common with jumbo loans. It can be frustrating because there is no way to predict when they will increase their rates.
I learned that if I am sending my client’s jumbo loan to a major bank like Chase, I lock the rate as soon as my client is comfortable with the rate they offer. I often lock before we submit it to underwriting, because it is harder to switch lenders if they increase their rates while it is in underwriting. I have seen large increases in the middle of the day and like to avoid those surprises.
SHOP MANY LENDERS WITH ONE SYSTEM
Lastly, it is often best to work with a loan officer who can shop many lenders at one time for you through their automated system. If you go directly to Chase and your rate isn’t locked, then they increase their rates, you either must accept the higher rate, or start all over again with another bank. A mortgage broker or mortgage banker can simply submit your loan to another lender with the documentation they have on file.
When my client’s loan is a conforming loan, I never worry about individual banks changing their rates. All 4 to 5 dozen of the lenders we use are “in-house”. That means we underwrite them. When I lock the rate, I simply choose the best lender in that moment. Everything is the same from my client’s perspective.
INSTANCES WHEN RETAIL BANKS’ RATES ARE LOWER THAN WHOLESALE RATES
Mortgage brokers and bankers can get wholesale rates, and we can get loans from lenders who do not lend directly to the public. There are times when retail banks’ rates are lower than wholesale rates.
One example is when you are a highly-valued client with Bank of America or a major investment company who also offers mortgages (e.g. Morgan Stanley). They value the relationship with you as a whole. They are often willing to offer a very low mortgage rate to solidify their relationship with you and ensure you don’t take your investment accounts to a competitor. Those of us who offer only mortgages can’t afford to lose money on the mortgage, because we don’t have the investment account income to offset it.
Another example would be if a bank or credit union is offering a special low rate to its retail customers only, and do not offer the same rate on a wholesale level. This is rare, but I have seen it happen. The difference is usually minor, about 0.125% lower in rate; but it is worth noting.
If you are not a highly-valued client of a bank or brokerage, you are often better-served by someone who can shop many lenders for you.