Ok, so you want a loan either for a purchase or a refinance. Do you just pop into your bank and apply? Should you use a mortgage broker? Go online? I’m going to explain as clearly as I can how ALL loans are priced. First let’s cover some basic mortgage concepts. I’m going to try ... [Read More]
Ok, so you want a loan either for a purchase or a refinance. Do you just pop into your bank and apply? Should you use a mortgage broker? Go online?
I’m going to explain as clearly as I can how ALL loans are priced. First let’s cover some basic mortgage concepts. I’m going to try to keep this very simple.
A “conforming” loan is a loan amount of $417K or less. In some counties like Santa Clara County the conforming loan limit is as high as $625K. If the loan amount is higher than $625K then it is considered a “jumbo” loan. I’m going to talk mainly about conforming loans but the same concepts apply to jumbo loans as well.
Interest rates on loans are priced based on “points”. A point is equal to 1% of the loan amount. So, one point on a $100,000 loan is equal to $1,000. On a $200,000 loan it is $2,000 etc.
Loans are “originated” by “mortgage banks”. A mortgage bank is a lender that makes the loan and then sells it on what is called the “secondary market”. Generally they do not have depositors or allow customers to have an account, but sometimes the mortgage bank is a large bank like Wells Fargo or BofA.
A mortgage bank strikes a deal with an investor-usually another large financial institution. The bank will make the loan to the borrower. Afterwards the investor will then purchase that loan for a set price. This “price” is based on percentage points of the loan amount. Remember that term “points”? The investor may keep the loan on its books or it may sell it again. This is a very basic description of the “secondary market”.
The higher the interest rate the more the investor will pay for the loan since it gives a higher return. So an investor will pay a mortgage bank more for a 4.5% 30 year loan than it will for a 4.0% 30 year loan.
These negotiated prices between the investor and the mortgage bank will vary depending on the financial markets and may vary depending on the size of the mortgage bank and the amount of money being committed by the investor.
Pretty much all conforming loans are priced based on what the US Treasury bonds are doing. The bonds that have the most impact on mortgage rates are the 10 year bond and the 30 year bond. Basically ALL lenders respond to what the bond market dictates.
Typically, when the yield of the bond goes down, so do interest rates. (The ‘yield’ is the return on investment.) There are always exceptions but this is basically what happens. I’m not going to get into the details of secondary markets and mortgage backed securities. It’s not something you need to know in order to get the best rate at the best price.
KEY CONCEPTS TO KEEP IN MIND:
Just remember that loans are made, then bought and sold by investors.
Investors pay more for loans with higher interest rates.
Mortgage interest rates are affected by the US Treasury bond markets.
The lower the yield, the lower the interest rates.
ALL lenders play by the same rules.
Part 2 will help you learn the difference between ‘retail’ and ‘wholesale’ pricing, why choose a broker or a bank, and how do rate sheets work! Stay tuned!
Related articles
HSH.com Weekly Mortgage Rate Radar: Mortgage Rates Higher Again, But Sustained Upward Trend Unlikely (prweb.com)
Mortgage Rates Up Again This Week (inquisitr.com)
Conforming loan limits expire in less than 30 days! (hsh.com)
