8 Questions Your Lender Should Answer About Mortgage Rates in California
It seems to make so much sense. You’re interested in a home mortgage in California, so the natural place to look is online. But just checking online for posted rates may not get you the outcome you desire. There are many factors of a person’s financial profile that affect your rate. Since online rates are based on the perfect scenario, what you think you’re going to get may be substantially different once your situation is evaluated.
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Mortgage rates change daily, sometimes multiple times per day. We are directly tied to the mortgage bond market (where mortgage interest rates are determined) so that we can advise our clients of the best time to lock their interest rate. But since you may be entertaining other mortgage companies for your loan, the following questions will help determine whether or not a lender truly knows what to look for so that they can provide you with the best rate once you’re in a position of locking in your loan:
How are mortgage rates determined?
Mortgage interest rates are determined by the pricing of Mortgage Backed Securities or Mortgage Bonds in the bond market. The media often implies mortgage rates are based off the 10-year Treasury Note (or the Prime rate), which is incorrect.
While the 10-year Treasury Note has been known to trend in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.
How often do mortgage rates change?
Mortgage rates may change throughout the day, however they only change on days when the Bond markets are trading securities since mortgage rates are based on Mortgage Bond prices.
Think of a Mortgage Bond’s sales price similar to that of a Stock that trades up and down during the course of a day.
For example – let’s assume the FNMA 30-Year 4.50% coupon is selling for $100.50. The price is 50 basis points lower from the previous day’s closing price of $101.00.
In simple terms, the borrower would have to pay an additional .50% of their loan amount to have the same rate today that they could have locked in the previous day. Ultimately, for mortgages, it’s not the rates that are changing, but the cost of that rate. You can always have any rate you want. The question is: “What are you willing to pay for it”?
What causes mortgage rates to change?
Mortgage Bonds are affected by market forces that influence the demand for bonds within the market. Key economic factors that have the greatest impact are unemployment percentages, inflationary fears, economic strength and the overall movement of money in and out of the markets.
Like stocks, most fluctuation are caused by consumer and investor emotions.
What do you use to monitor mortgage rates?
There are several great subscription based services available to monitor Mortgage Bond pricing.
The key is to make sure the lender is aware they should be monitoring Mortgage Bond pricing, such as the Fannie Mae 30-Year 4.50% coupon… and not the 10-Year Treasury Note or the news media. If they’re not monitoring rates and prices, how can they help you decide when to lock your rate?
When the Fed changes rates, why do mortgage rates move in the opposite direction?
It is a common misconception that when the Federal Reserve implements a rate cut it is immediately correlated to a reduction in mortgage rates.
The Federal Reserve policy influences short term rates known as the Fed Funds Rate (“FFR”). Lowering the FFR helps to stimulate the economy and increasing the FFR helps to slow the economy down. Effectively, cutting interest rates (FFR specifically) will cause the stock market to rally, driving money out of bonds and creating potential for inflation.
Mortgage Bond holders need to obtain a higher rate of return on their money if inflation is increasing, thus driving up mortgage rates. With the Federal Reserve Board meeting every six weeks, this is an important question to ask. If your lender does not have a firm understanding of this relationship, they may leave your rate unprotected costing you thousands of dollars over the life of your mortgage.
Do different programs have different interest rates?
Conventional, FHA and VA loans can all carry different rates on a 30-Year fixed mortgage. FHA and VA loans are insured by the Federal Government in the event of defaults. Conventional mortgages are insured by private mortgage insurance companies, if insurance is required. Think of it like insurance you buy on your car. If you’re in a wreck, the insurance pays you for its repair. In the case of mortgage insurance, you make insurance payments on a policy that insures the lender loaning you money against the event of you not paying back the loan. If you stop paying, the insurance pays the lender.
Typically, FHA and VA loans carry a lower rate because the investor views the government backing as less of a risk. While rates are usually different for each program, it may be more important to compare the monthly and overall cost during the life of the loan to determine which program best suits your needs.
Why do Adjustable Rate Mortgages (ARM) have lower rates than fixed-rate mortgages?
An Adjustable Rate Mortgage (ARM) is usually fixed for a specific period of time. The periods range from 6 months, 1 year, 3 years, 5 years , 7 years and 10 years. The shorter time period the rate is fixed, the lower the initial interest rate tends to be .
This is due to the borrower taking the future risk of increasing interest rates. The only instance where this would not be true is when there is an inverted yield curve where short-term rates are higher than long-term rates.
Why are rates higher for different property residence types?
Mortgage interest rates are based on risk-based pricing. Risk-based pricing allows adjustments to par pricing (the wholesale base rate from the lender ) for risk factors such as; FICO scores, Loan-to-Value percentages, property type (Single Family Residence (SFR), Condo, 2-4 Unit properties), occupancy (Primary, Vacation or Investment) and mortgage type (Interest Only, Adjustable Rate etc).
This allows the investors who lend their money for mortgages to receive additional compensation for taking additional risk.
Second homes and investment properties carry higher rates because if the borrower encounters a financial hardship, they’re more likely to make the payment on the home they live in rather than one where they don’t live?
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Related Mortgage Rate Video:
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Related Mortgage Rate Articles:
- Mortgage Rate Overview
- Top Five Market Factors That Influence Mortgage Rates
- What’s The Difference Between APR and Note Rate?
- How Are Mortgage Rates Determined?
- How Do Mortgage Rates Move When The Fed Lowers Rates?
January 31, 2010 by Andrew Vierra · Leave a Comment
Andrew is a veteran Mortgage Banker & Broker with extensive experience structuring residential home mortgages. Our home loan products include FHA and Conventional financing; I specialize in VA home loans for active-duty and military veterans.
