Can mortgage rates really be forecast?
If you’re in the process of taking out a new mortgage loan either to purchase your home or refinance an existing loan can you predict which way interest rates will go prior to locking? People ask me all the time which way I think mortgage rates are going; however, I try to avoid making predictions because you simply cannot forecast mortgage rates.
Anyone who tells you otherwise is selling something. There are however, steps you can take to ensure the mortgage rate you lock is the lowest possible. Here are several mortgage rate tips that will literally save you thousands of dollars on your next home loan.
Mortgage Rate Forecast Snake Oil
No one can predict mortgage interest rates. If your mortgage broker tells you that they can predict when rates will go up or down they are simply guessing. Forecasting mortgage rates is like forecasting what the stock market will do. Much like other financial markets mortgage rates move on economic news and data. There is typically an inverse relationship with mortgage rates and economic news that you may have noticed during the last recession; bad economic news and bleak outlook means lower mortgage rates and vice versa. Of course this isn’t always true but it is a good rule of thumb for understanding how mortgage rates move with the economy.
It is a waste of your time and effort trying to time the market and you should be suspicious of anyone claiming to have a mortgage rate forecast. Instead of trying to time mortgage rates your best strategy for taking out a mortgage is to lock in the lowest mortgage rate possible. The question now becomes how you find the lowest mortgage rates.
Finding the lowest mortgage rate is not as simple as you think. Most homeowners approach this by collecting mortgage quotes from several lenders and choosing one with the lowest interest rate and fees. The problem with this approach is that the mortgage rates you get when comparison shopping have all been marked up to create commission for the person or bank offering you that quote. Home mortgage loans are retail products much like everything else you buy today; if you want the best possible deal for your next home loan you’ll need to go wholesale.
What Are Wholesale Mortgage Rates?
Wholesale Mortgage Rates are also known as Par Mortgage Rates and are simply interest rates that you don’t have to pay anything to get and do not create an extra commission for the person or company arranging your home loan. When you have to pay to qualify for specific mortgage rate this fee is known as a “discount point.” You should also know that banks do not offer par rates to their customers; while their mortgage rates are typically not marked up to create a commission for the person arranging the loan they will be marked up to create a commission for the bank when your loan is sold on the secondary market. Banks are also exempt from disclosure laws in the United States and are not required to disclose any of their markup or profit margin on your loan thanks to a loophole in the Real Estate Settlement Procedures Act.
How to Get the Lowest Mortgage Rate
Getting a mortgage rate forecast won’t help you when taking out a new home loan so how can you get the lowest possible mortgage rates? You don’t have to be a financial guru to get a par mortgage rate for yourself; you simply need to understand how mortgage quotes work to avoid overpaying the person or company arranging your loan. I’m not saying this person doesn’t deserve to be compensated for their work on your loan; on the contrary, that is what the loan origination fee is for. The problem is that the many mortgage brokers help themselves to this “extra” commission known as Yield Spread Premium from the lender at your expense.
Why would the lender pay your mortgage broker a commission for your home loan? What’s in it for the mortgage lender? You’re already paying the loan origination fee to the Mortgage Company or broker, why would the mortgage lender pay extra, especially in this economy? Mortgage lenders reward brokers that lock and close home loans with higher than necessary interest rates with a fee known as Yield Spread Premium. Lenders do this because mortgage loans with higher than “market” rates bring them the most profit when your loan is sold to investors. Avoid this markup and you’ll get a par mortgage rate saving yourself thousands of dollars every year that you keep the loan.
How do you get a par mortgage rate? You’ll first need to find the right mortgage broker to arrange your loan. You already know that banks don’t offer par rates and most mortgage brokers are unwilling to negotiate this fee. In fact many brokers become defensive and angry when you question them about Yield Spread Premium. If your mortgage broker does this it is a good indication that you need to find someone else for the job. You’ll also need to find a mortgage broker willing to work for a flat origination fee; one percent is a reasonable amount to pay for arranging your home loan without marking up your rate for Yield Spread Premium. Instead of shopping for the right home loan you’re actually shopping for the right mortgage broker to arrange your loan.
You can learn more about finding the right mortgage broker while avoiding junk fees and markup of your mortgage rate by checking out my Underground Mortgage Videos. Here’s a sample showing how you can avoid this unnecessary markup of your mortgage rate.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
