A buyer’s bank may not offer the best mortgage rates
NEW YORK – Oct. 14, 2016 – Mortgage rates are near all-time lows, and it might be hard to imagine them going even lower. And yet, some loan experts say, many banks aren’t giving borrowers the lowest rates they deserve.
It’s a matter of how banks price mortgage loans: Loans must be attractive to potential investors who buy loans from the banks. Lenders of course want to make a profit. They also need to make sure they have enough staff to handle the demand for mortgages.
Most of these factors are out of your control – but there still are ways you can tilt the best-rate odds in your favor.
Investors drive pricing
More than 90 percent of mortgages get sold after they close to investors such as Fannie Mae, Freddie Mac or the Federal Housing Administration. Lenders sell their loans to free up more capital to lend and remove the risk that borrowers may default, so they offer mortgages with rates and terms at which investors will buy them.
“Mortgage rates are not so much dictated by the banks as they are by the investors that purchase these loans,” says Anthony Davenport, a former mortgage originator, now a credit management adviser and founder of Regal Financial in New York.
Pricing loans now for rising rates later
The mortgage industry has become so competitive that there’s little room, or desire by lenders, to pad interest rates, says Eric Smith, another former mortgage originator and banking executive, now a financial literacy coach in Atlanta. The only exception, Smith says, might be for large mortgages that lenders often keep on their books.
Fannie and Freddie don’t buy these so-called “jumbo loans,” typically $417,000 or over in most areas of the country, so lenders usually hold onto them, as well as the relationship with the affluent clients who take them out.
For those loans, lenders might be “inflating that (mortgage) price a little bit to hedge against when short-term rates do start to come up,” Smith says. That helps protect their profit margin on low-interest rate loans, Smith says.
Davenport adds that jumbo lenders “are in many cases borrowing money from places like the Federal Reserve at 0.25-0.50 percent and not passing along the savings to customers.”
Shmuel Shayowitz, president of Approved Funding in River Edge, New Jersey says there are two other instances when banks may hedge rates a bit. Sometimes lenders are waiting to be sure that a lower rate will stick and not rebound immediately, he says. That would leave the bank with a rate locked for a customer that’s lower than a now-prevailing rate.
Other times it may be an effort to manage mortgage demand in order to clear a backlog of loans without adding manpower to handle additional volume, Shayowitz adds.
Two ways to get a rate break
While there is little – make that nothing – you can do about bank profit margins or how Fannie and Freddie shape lender pricing, Davenport says borrowers can make a tactical move or two to ensure they’re doing all they can to get the best rate.
First, mortgage rates vary according to a borrower’s FICO score. “Someone who has a 740 score isn’t really likely to default any more than someone who has a 760 score, but they’re going to pay a higher interest rate,” Davenport says.
Knowing where price breaks fall on the FICO score scale can help a borrower earn a significant discount. For example, if a lender’s discount kicks in at a 700 credit score and yours is 680, you might decide to reduce a credit card balance or two enough to bump your score up to the next level.
Secondly, shop around, Smith says. Make sure to ask for a rate based on zero discount points so you can compare pricing properly.
Copyright © 2016 The Associated Press, Hal Bundrick. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. This article was provided to The Associated Press by the personal finance website NerdWallet.com
Freddie Mac: Pay no attention to homeownership rate
WASHINGTON – Oct. 14, 2016 – For over a decade, the national homeownership rate has been declining. It peaked at 69.2 percent in 2004, but for the past 10 years, the rate continued to fall.
Today the homeownership rate is less than 63 percent, the lowest in half a century. Some industry analysts are predicting further declines too, saying the homeownership rate could drop below 60 percent.
In new Insight posted at Freddie Mac’s website, however, the mortgage giant says such doom-and-gloom projections ignore potential macroeconomic influences that likely will have a significant impact on the homeownership rate’s future.
For example, the future of housing finance has yet to be sorted out, Freddie Mac notes. The government-sponsored enterprises (GSEs: Fannie Mae and Freddie Mac) are in their eighth year of conservatorship, and that will change at some point.
“No one knows when a consensus on the complex issues surrounding housing finance will be reached in Congress, but whatever choices are made will surely influence the future path of homeownership,” the report notes.
Also, millennials may still play catch up. One day soon they may finally decide to get married, raise families and buy homes – and when that happens, it could occur at a faster pace than it did with previous generations.
Sean Becketti, Freddie Mac’s chief economist, says projections that homeownership rates will drop also fail to take into account that today’s millennial 35-year-olds may not act exactly like today’s baby boomer 55-year-olds.
Further, factors that slow home buying in non-white demographic groups may be overcome, according to Freddie Mac.
Becketti says other studies predicting a drop in the homeownership rate fail to take into account such “future macroeconomic disruptions, significant policy changes, or shifts in social attitudes in their calculations.
“In either case, we believe their projections may be overly pessimistic,” Becketti says. “The income and education gaps that are responsible for some of the differences may be narrowed or eliminated as the U.S. becomes a ‘majority minority’ country. And as these types of potential homebuyers comprise a larger and larger share of the population, it will become increasingly expensive to overlook them. Profit-oriented financial institutions will be motivated to find better ways to serve them.”
Source: “Why Are the Experts Pessimistic About the Future of Homeownership?” Freddie Mac (Oct. 12, 2016)
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