If I had a crystal ball and could predict what interest rates will do in the short term I would be a wealthy woman. But I don't have predictive powers. Like everyone else I can only make a semi educated guess as to what is going to happen next week, next month or even next year. It is possible to make a broad statement that after all this time of financial turmoil the closer we get to a more stable economy the closer we get to rates moving up to more normal levels.
For a whole generation of consumers - - the Millennials, these low interest rates are at normal levels. These rates have been abnormally low for seven or eight years. Long enough that many young adults have matured with low rates. Low rates forevermore, right? Not really. A more normal interest rate indicative of a strong stable economy would put them in the mid 5's to low 6's. The original mortgage that I purchased my own home with in 2000 was a 7.25% rate. That was considered a good rate at the time for a 30 year fixed rate loan, especially when on considers I bought my first home in the age of 18% mortgage rates.
Sadly, this time of abnormally low rates is coming to an end. When? I can't say for sure. What I can say is that they are low now, so take advantage of them because when the end comes, it may be swift.
It is not unusual to receive a phone call from someone who is shopping for a home loan asking me what the current interest rate is. I normally give the rate that I would give to high credit score borrowers with money to put down. But really, it isn't that simple.
Let's begin with the fact that if I quote you an interest rate on Thursday, it may not be the rate on Monday. Interest rates are based on financial market forces -specifically sales of mortgage bonds which are considered a safe place to invest money - or safer than stocks anyway. So if there is volatility in the financial markets, money moves to bonds, mortgage and treasury bonds being the beneficiaries which lowers interest rates. If money is moving out of bonds to purchase other financial instruments, the result is higher rates. So a lot of where rates are depends on what is going on in the global economy. Secondly, the Federal Reserve, over the past six years has been buying millions of dollars worth of mortgage and treasury bonds to keep the US economy on stable footing. That trend is reversing and the Fed is investing less - which means at some point they are going to withdraw from bond purchases all together and rates will go up. It is unlikely that private investors will continue to purchase mortgage bonds at the same levels as the Federal Reserve. That means that long term, rates will increase.
Daily changes in the financial markets affect what happens with interest rates which is why a borrower can be quoted a rate one day and then when they go back to the lender they may not be able to obtain the same rate unless they pay a discount point or a portion of a discount point if rates have increased. It feels like bait and switch. It might be, not everyone is truthful, but in most cases it is a direct effect of the market. I have seen rates change as many as five times in a day so no rate can be guaranteed unless the borrower is ready to commit and lock that rate.
Let me take a moment to digress and explain what happens when a rate is locked. What is done with rate locking is essentially to buy money as a product. It is similar to going to Best Buy and purchasing a computer. On Wednesday it is at one price, but on the following Sunday it may be another price. Interest rates represent money for sale. Once an interest rate is locked the money is purchased for a period of 30, 45, or 60 days at one particular price. If the transaction closes the price is good for the duration of the mortgage loan-assuming this is a fixed rate loan.
Back to my Best Buy analogy, if one purchased the computer on a Wednesday, and then the sale flyer comes out on Sunday, chances are you can take your receipt back to Best Buy and receive an adjustment to the sale price. Unlike the sale at Best Buy, interest rates don't work that way. If you lock your rate that is the rate. If the rate is lower a few days later, you are probably going to have to live with the higher rate. While the lender can lower your rate, you are required to take the pricing that came with the rate on the day that it was originally locked. So let's say you locked at 4.25%. Two days later the rates went down to 4.0%. You could no doubt obtain that 4.0%, but there might be cost or point or partial point that you would have to pay to obtain it as you have to take the 4.0% at the price it was the day of the original lock.
This is how lenders are not like Best Buy. If Best Buy chooses to honor a sale price, they can just deduct it from their profit margin. Lenders don't have that flexibility. Why? The Federal Government, that's why. Best Buy and retailers aren't subject to oversight by the Federal Government on their transactions. Lenders and the money markets are. It's not just the lender who is originating the loan that is involved. The lender has an investor who is providing the money. (You didn't think most lenders had a vault in the back room with your loan money in it, did you?)
If that was the case then yes, probably you could get the lower rate with no cost. But most loans are being packaged up to sell to someone else and that investor is the one providing the money at a particular interest rate. That investor has promised you that they will hold that rate for a certain amount of time. You wouldn't want them to increase your rate if rates went up, would you? The same principal applies if rates go down. (I understand, then it becomes your money-but it really is all the same thing.)
Some lenders do have provisions for what is known as a "float down" if rates change dramatically once a rate is locked. But that feature is normally only used during periods of extreme rate
instability and there is often a cost to it.
Let's get back to the subject of how your personal rate is determined. Typically Fannie Mae and Freddie Mac set the pricing structure for mortgage loans. Interest rates are determined by the financial markets, but Freddie an Fannie put what is known as "adjustments" in place for the individual characteristic of each loan.
One of those characteristics is credit score. Credit scores are tiered in 20 point levels. At each interval an "adjustment" is added or subtracted. Also considered is the loan amount, lower loans have higher adjustments (these adjustments can be bumped up or down by each individual lender depending on how high their tolerance is for smaller loans.) That doesn't seem fair you might say. Why would a small loan have a higher rate than a larger one. The thing is small loans take just as much work and energy to close as a big one at a much lower rate of return. It's simple math-small loans cost more to process with lower profit margin, so unfortunately they cost more. The third characteristic that is taken into account is the loan amount to the value of the property. A borrower that is putting 5% down will have a higher adjustment than one that is putting 20% down. A fourth item is what is the loan being used for? A purchase? Refinance? What kind of refinance? Cash out or rate and term? All these adjustments are weighed out and determine the rate. Keep in mind this is also about risk. A small loan for a borrower with a credit score of 620 is going to cost more than a large loan that the borrower is putting 20% down and has a credit score over 740 for the simple reason that the smaller loan has a much lower rate of return for a higher risk of default than the second one.
The reasons cited about are why I am hesitant to throw out a rate when someone calls me about rates and gives me no information other than wanting the current rate. They can be two very different numbers.
We always strive to give the best interest rate available to our clients and when compared with competing rates we generally speaking are lower than our competitors. But each individual loan is specific in nature and just as one loan doesn't fit all, neither does one interest rate. Between all our lenders I am certain that we have the ability to give our clients the best rate as well as the best terms they will find in our market.
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