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"What is your rate today?" prospective borrowers
ask when they call up a mortgage lender shopping for rates. Well,
there isn't just one rate. There is a choice of rates
and the rates are very similar from one lender to the next
- perhaps identical.
Every morning a 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 loan officers' eyes only because they represent the "cost" of
a loan to the loan officer, not the cost to the borrower.
Below is a sample of one section of a rate sheet for thirty-year
fixed rate 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 the "cost" to
the loan officer, expressed in "points." One
point is equal to one percent of the 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 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 loan officer and the branch
for originating a loan at that rate.
Almost all loan officers are paid on commission. The
amount earned by the loan officer and the branch is subject
to a "split" -- just like real estate agents. Part
of it goes to the 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.
Before quoting you an interest rate, the 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 loan officer adds on to his cost)
but does not want to overcharge borrowers either (so they
set a maximum the loan officer can charge) Between that
minimum and maximum, the loan officer has a great deal of
flexibility.
For example, say the 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 loan
and quote you that rate. According to the rate sheet
above, seven percent will cost you zero points. Six
and three-quarters percent will cost you one point.
In our example, at 7.125% the 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.
 Locking
In Interest Rates
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to Mortgage Articles & Advice
copyright 2000 by Terry Light and
RealEstate ABC
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