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You may have noticed that mortgage rates are at an all time low and few believe they can go much lower. However, some financial experts are claiming that banks are not offering borrowers the lowest rates that they deserve.
One must first understand exactly how banks price their mortgage loans. It is a rather complicated mix of making loans attractive to possible investors while still protecting the profit margins for the higher interest rates that will eventually come. Additionally, they must be able to balance the loan demand with their available staff. By carefully managing the above variables, lenders will have sufficient funding to make loans while remaining competitive and profitable.
The vast majority of factors that control your home interest rate will always be out of your control, however, there are two that you do have some control over.
Compare Mortgage Rates
One of the most essential aspects to consider about mortgages is the rates are not so much dictated by the banks but by the investors who have purchased the loans. With that in mind, 90% of all mortgage loans that are currently bought on the secondary market are through the Federal Housing Administration, Fannie Mae, and Freddie Mac.
Most lenders are looking to sell their loans in an effort to free up more capital as well as reducing the possibility of borrowers defaulting from their books. Therefore, they will price their mortgages with terms and prices in which many of these quasi-government investors purchase them.
How Loans are Priced in Anticipation of Rising Costs
There is no question that the mortgage industry is one of the most competitive in the world and there is very little room available to pad interest rates. In addition, very few lenders see the need to do so. Of course, there are always exceptions and in this case it is for larger mortgages that many lenders will keep on their books.
These types of mortgages are known as “jumbo loans” and are usually for amounts over $726,200, which will be over the limit for Freddie and Fannie loans. With this in mind, they are not able to be purchased by government-sponsored entities, therefore, the lenders will sit on these loans.
It would be safe to assume that lenders who are holding jumbo loans and rather concerned that rates are going to rise, will inflate a mortgage price a little just for when short-term rates begin to come up. This is going to help protect their profit margin of lower interest rate loans. In addition, for banks that are holding jumbo loans they may very well be borrowing money from the Federal Reserve at a rate of .25 to .50% and simply not passing on those savings to customers.
There are other instances in which banks tend to hedge their rates slightly: In some instances lenders will wait a bit to ensure that lower rates are going to remina and simply not rebound. In this case, the bank is left with a locked in rate that is much lower than the now-prevailing rate.
In other situations it may be designed to manage the demand of mortgages in order to clear out a backlog of loans without the need for additional employees.
How to Get a Lower Mortgage Rate
Let’s be clear, there is absolutely nothing you can do about the bank profit margins or the pricing on Freddie and Fannie loans. However, there are a couple of things you can do to help achieve a much lower rate and save considerable amounts of cash. Obviously, mortgage rates are going to be based upon the borrower’s FICO score, and this is where you see real adjustments. An individual with a score of 740 more than likely will not default anymore than an individual with a 760 score, however, the rate is going to be higher.
Knowing where the price breaks are going to fall on FICO scores will allow you to gain a significant discount. An example of this would be if a lender offers a discount on 700 credit scores and you have a 680, it would be wise to reduce some credit card balances and work on bumping up your score before applying.
In addition, if you are truly looking for the best discount, it is always wise to shop more than one lender. The vast majority of lenders are going to offer quotes with various discount points built in.
As you can see there are a few things in which you can do to ensure you are not held hostage to the rates that the bank is offering. Take the time to do your research and go in as an educated consumer and save more money for your future.