Mortgage Rates

How to Shop Mortgage Rates Like a Pro

This easy-to-follow guide covers everything you need to know about shopping for mortgage rates, and how to do it like the pros. Start from the beginning or jump in wherever you are to continue!

Where Do Mortgage Rates Come From?

One word answer – Mortgage Backed Securities (MBS). Okay, that’s three. MBS is a kind of a bond that trades on Wall Street every trading day. If there is more demand for MBS, the price of MBS goes up and mortgage rates go down. If there is less demand, then the inverse happens and the rates go up

The price of MBS gets impacted by several factors, but most importantly, macroeconomic news. Better economic news usually means good news for the stock market and bad news for bonds. For example, when unemployment news is reported better than expected (meaning more jobs are created), MBS prices go down. Bottomline – better economic news is bad for mortgage rates

It’s a common misconception that the Fed sets the mortgage rates. While Fed’s policies may have an overall impact on rates, it doesn’t control the day-to-day changes to mortgage rates. So even though the Fed sometimes doesn’t change the rates for several months or even years, mortgage rates can change on a daily basis.

Make sure you work with a lender that tracks MBS on an hourly basis so that he/she can guide you on when is the right time to lock the rate. At Arcus Lending, we do exactly that. The right advice on when to lock rates can save thousands of dollars over the term of your loan!

Understanding Loan Level Price Adjustment

Mortgage rates and fees are determined on a theory called “Risk-Based Pricing.” As a borrower, if you are perceived to be a bigger risk, be ready to pay a higher rate and/or higher fees.

Loan Level Price Adjustment (LLPA) is an adjustment to the rate/fees charged to you based on your credit qualifications. This applies to conventional loans backed up by Fannie Mae/Freddie Mac. LLPAs are assessed based upon certain eligibility or other loan features, such as credit score, loan purpose, occupancy, number of units, product type, etc.

Credit Score–For conventional mortgages, 740+ is considered an excellent score. Any score under 740 can result in higher costs or fees. Assume your credit score is 719. If you are getting a loan amount of $400,000 with 20% down, you will pay a fee of $3000 extra compared to someone with a 740 score (see chart below).

Loan to Value Ratio (LTV)–Higher LTVs mean higher rates. So if you are getting a loan with as much as 40% down payment, you should get better rates than someone who only has 10% down. Again, assuming a 719 score, that would mean a difference in cost of 1.25% or $5,000 for a $400,000 loan amount. (see chart below)

≤60.00% 60.01 – 70.00% 70.01 – 75.00% 75.01 – 80.00% 80.01 – 85.00% 85.01 – 90.00% 90.01 – 95.00%
Representative credit score Applicable for all mortgages with terms greater than 15 years
≥ 740 -0.250% 0.000% 0.000% 0.250% 0.250% 0.250% 0.250%
720 – 739 -0.250% 0.000% 0.250% 0.500% 0.500% 0.500% 0.500%
700 – 719 -0.250% 0.500% 0.750% 1.000% 1.000% 1.000% 1.000%
680 – 699 0.000% 0.500% 1.250% 1.750% 1.500% 1.250% 1.250%
660 – 679 0.000% 1.000% 2.000% 2.500% 2.750% 2.250% 2.250%
640 – 659 0.500% 1.250% 2.500% 3.000% 3.250% 2.750% 2.750%
620 – 639 0.500% 1.500% 3.000% 3.000% 3.250% 3.250% 3.250%
< 620 0.500% 1.500% 3.000% 3.000% 3.250% 3.250% 3.250%

Loan Program – Fixed-rate mortgages would typically have higher rates than an Adjustable Rate Mortgage (ARM).

Occupancy Type – A primary residence or second home would get you a better rate than an investment property.

Property Type – A condominium with less than 25% down payment will have a higher rate than a single-family residence.

Loan Amount – The conforming loan limit is $417,000. But in some high-cost areas like San Jose, CA, the loan limit is $625,000. But the rates are higher on loan amounts over $417,000.

≤60.00% 60.01 – 70.00% 70.01 – 75.00% 75.01 – 80.00% 80.01 – 85.00% 85.01 – 90.00% 90.01 – 95.00%
High-balance mortgage loans
ARM (pricing based on higher of LTV/CLTV) 0.750% 0.750% 0.750% N/A N/A N/A N/A
Cash-out refinance 1.000% N/A N/A N/A N/A N/A N/A
Multiple-Unit Properties
2-unit property 1.000% 1.000% 1.000% 1.000% N/A N/A N/A
2-unit property 1.000% 1.000% 1.000% N/A N/A N/A N/A
HighCondominiums (excluding cooperatives; excluding detached condominium loans delivered with SFC 588)6 Applicable for all mortgages with terms greater than 15 years
620 – 639 0.000% 0.000% 0.000% 0.750% 0.750% 0.750% 0.750%

Subordinate Financing – if you are getting a second mortgage along with the first, you may end up paying a higher rate on the first. (See chart below)

LTV Range CLTV Range Non Interest-Only LLPA
Credit Score < 720 Credit Score ≥ 720
≦ 65.00% 80.01% – 95.00% 0.5000% 0.250%
65.01% – 75.00% 80.01% – 95.00% 0.750% 0.500%
75.01% – 95.00% 90.01% – 95.00% 1.000% 0.750%
75.01% – 90.00% 76.01% – 95.00% 1.000% 0.750%
≦ 95.00% 95.01% – 97% 1.50%

Now you can see how sometimes even a small difference in qualifying criteria could result in significantly higher rates and fees. Usually, the advertised rates assume best-case scenarios – 40% down payment, 740+ credit, etc. Most of the borrowers usually don’t qualify for those rates.

Questions to Ask a Lender While Shopping Mortgage Rates

What’s the duration of the Lock period?

Make sure that when you are quoted a rate, you are asking the broker what the lock duration is. Make sure that the lock period allows you enough time to complete your purchase transaction.

Also, ask for a lock extension policy. What happens if the lock expires and the loan hasn’t closed? How much are the lock extension fees and who pays for it?

Do you know what impacts mortgage rates?

It’s important that you work with a Loan Officer who knows what impact mortgage rates and how they can change on a daily basis. Since you have read this guide, you are already aware of this.

You can compare the notes from this guide with the Loan Officer’s answer to check if he really knows the answer

How would you advise me when the right time to lock is?

Check with the Loan Officer if he/she tracks the MBS live. Even a small change of 12 basis points can impact the rate you qualify for. If the Loan Officer doesn’t track MBS live, he/she may not be able to advise you at the right time to lock the rate.

Which of the estimated fees can increase at closing?

The loan officer will provide you with a Good Faith Estimate (GFE) with details of your closing costs. But it’s just an estimate and can change at closing. So, ask the loan officer to explain every single item on the GFE and ask which ones can increase at closing. Understand why they would increase and by how much they can increase.

Should You Pay Points or Not?

Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

If you take out a $300,000 mortgage and decide to pay one point, this translates to an up-front closing cost of $3000. Paying a point upfront saves $100 a month, but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months

Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance. When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.

How to Compare Mortgage Rates

When you shop different lenders, you get several interest rate and cost options. Sometimes it can be easy to compare them. See the example below:

  • Lender 1: Rate Quote – 4.5%, Loan Fees – $1000
  • Lender 1: Rate Quote – 4.5%, Loan Fees – $2000
  • Lender 1: Rate Quote – 4.5%, Loan Fees – $3000

In this case, it’s easy to figure out that Lender 1 is an obvious choice

At other times, it can be very confusing to find out which one is the best option. Let’s take a look at an example below:

  • Lender 1: Rate Quote – 4.5%, Loan Fees – $3000
  • Lender 1: Rate Quote – 4.625%, Loan Fees – $1000
  • Lender 1: Rate Quote – 4.375%, Loan Fees – $4000

Annual Percentage Rate (APR) was introduced to make rate comparisons easy. But, different lenders calculate APR differently. Here’s an easy way to rate shop, so that it’s really easy for you to compare different rate quotes:

Tip 1 – Do not just compare rates, compare fees as well. A lot of borrowers make a simple mistake – they call different lenders and compare the rates offered. They forget to ask for their fees. A lender with a lower rate could still turn out to be more expensive if their fees are significantly higher than someone with only a slightly higher rate.

Tip 2 – Ask all the lenders to quote you with the same closing cost. For example, ask them to give you a rate with $2000 closing cost. If you are looking for a no-cost refinance, ask for all quotes with zero cost. That way, all you have to do is compare the rates.

Tip 3 – How to Shop mortgage rates in a very short period, ideally within a couple of hours. Mortgage rates change frequently. You should be shopping with different lenders when the MBS is trading at the same level. Else, you won’t be comparing apples to apples. If you shopped with Lender A on Monday and Lender B on Tuesday, the market may be very different.

Tip 4 – Don’t always go with the lender with the lowest rates. This may shock you, but it’s true. This is also my best advice.

Bait and Switch technique – sometimes when it’s too good to be true, it’s exactly that. Some lenders will rope you in with non-existent rates and then change the terms of the deal as you move forward with the loan process.

Bad reputation of lowest-priced lenders – sometimes when it’s too good to be true, it’s exactly that. Some lenders will rope you in with non-existent rates and then change the terms of the deal as you move forward with the loan process.

Accessibility – you need to work with a lender that works beyond 9 am – 5 pm Mon-Fri. It’s going to be one of the most important financial transactions of your life and you want to make sure you are working with someone who is accessible after hours. If you are a first-time homebuyer, this is especially important. I have answered so many questions with my first-time homebuyer clients at 8 pm weeknights or 10 am on weekend mornings.

Check on the lender’s expertise and credibility – consider the expertise and credibility of the mortgage lender. Google them to see if they have been covered favorably in the media. Check their Yelp and Google ratings and read client reviews. A well-versed consultant will ask you many questions about your short- and long-term goals and assist you in choosing a loan program that is truly suited to those goals.