How to Get the Best Mortgage Rate: Lesson Six
Making lenders compete to offer the lowest rate.
Welcome back to the Theopetra Testament. Subscribe now so you don’t miss our weekly educational posts bridging the gap between cryptocurrency and real estate. This post, composed by our Self-Repaying Home team, will give you a brief update of financial markets in relation to housing before diving into the sixth part of our series on purchasing a home.
Current Mortgage Rate: 4.89%, and just 11 basis points away from a ‘5’ handle... (Bankrate.com)
Yields continue their march higher amid a backdrop of hawkish Fed Speak, with even dovish and key personnel such as Lael Brainard (nominated by the Biden Admin for the vice chair position of the FOMC) and Mary Daly throwing in the towel on the notion that inflation is ‘transitory.’ Quite the opposite, in fact:
“Inflation is much too high, and subject to upside risk” - Brainard
“Inflation at these levels is as harmful as not having a job [...] Rising rates is what is necessary to ensure you aren’t going to bed at night and worrying about whether prices will be higher again tomorrow” - Daly
With inflation roaring at 40 year highs, markets are now forced to anticipate a quicker and more drastic rate hiking regime over the coming months; as such, nearly 9.5 hikes are now priced in over the next 10 months while the yield curve is inverted between the 3 year point (~2.65%) and 30 year point (~2.60%), signaling a warning sign on possible future recession and policy error, as nearly all front end rates are higher by 25-30 basis points since our last piece! At this point, it would be a surprise if the next rate hike is not 50 basis points, or 2x the size of March’s rate hike.
Amid this continual move higher in rates (that is now historic in many ways), risk assets suffered their worst week since early March with the S&P500 losing 5% and shaving off nearly half of its gains from its March rally as risk appetite wanes. A stronger Dollar, weaker oil, and the loss of the ‘dead cat bounce’ all serving as likely culprits for the recent retracement as geopolitical concerns fade in the background (for the time being). Also not helping? Former Fed Presidents openly canvassing for the Fed to ‘force stocks lower’ to help battle inflation.
Looking ahead, markets are about to enter #EarningsSzn with a slew of publicly traded companies reporting Q1 results. The Economic Calendar brings us the latest CPI report next week, while over the next several weeks, the Fed begins in early stages to shrink and roll off its $9T Balance Sheet (yes, that’s a big T for Trillion).
Interesting Housing Headlines
“The 2022 homebuying season is kicking into high gear, and it’s even more frenzied this year as rising mortgage rates and record-low inventory push buyers to act quickly.” (Washington Post)
Philadelphia Federal Reserve President Patrick Harker suggested that a longer-term mortgage (40 years) could help some homeowners avoid default.
Lesson Six: Finding The Best Mortgage Rate
The first rule of getting the best rate is realizing that mortgages are a commodity. The second rule is to know that loan originators are like used car salesmen and every dollar they overcharge you is another dollar in their pocket.
A Mortgage is a Commodity
Far too often I hear about someone deciding to buy a house and either walking into their local bank/lender or using a referral from a friend out of convenience rather than shopping around for the best rate. In my experience the first rate offered is approximately 0.25-0.75% above where it should be. Think about that. On a $400,000 loan a 0.25% savings is ~$60 per month for 30 years or ~$22,000. A 0.75% savings is ~$180 per month or ~$65,000! I REPEAT, both of these mortgages do the exact same thing! The house you get to buy with it is no different! So the next time someone recommends you get a mortgage with their friend because they are “chill” you now have to think to yourself whether dealing with a chill person for the 2-4 week loan process is worth $22,000-$65,000...
Most people do not realize they can shop around for a mortgage. Also, when the time comes to shop around you are very busy making the biggest financial decision of your life (buying the actual home) so mortgage shopping gets skipped over. That is why we are here to show you the ropes so you can do most of the leg work (never skip leg day!) before you will ever need it.
It doesn’t matter whether your lender is right down the street in your hometown or some podunk credit union in the middle of Alaska. All you should care about is that they are somewhat competent and that they offer the lowest rate.
Loan Originators *ARE NOT* Your Friend
“My lender said X% was the best they could do and that was a great rate” And you are buying this? Well I’ve got some beachfront property in Arizona to sell you! Like many things in life, understanding the incentive structure is key. Loan originators are typically paid commission based on total loans originated at the highest rates possible. AKA the exact same incentive structure as a used car salesman- treat them with the same skepticism!
Ok, I got it. Wen Lowest Rate?
Start by comparing rates from the banks you have a current banking relationship with. Reach out to every bank you have a checking/savings/credit card/car loan relationship with and ask for a ZERO point mortgage rate providing minimal details (rough home cost, down payment %, rough credit score). Providing tons of info is one way they try to lock you into using them and not putting them in competition. You also don’t want a ton of hard inquiries impacting your credit score right before taking out a mortgage where credit score is a main determinant.
Use a site like Bankrate.com and input your basic info and get quotes (zero points paid). You will want to call the best few lenders to get actual quotes as sometimes the posted rates aren’t correct.
Get quotes from top lenders like Rocket/Wells Fargo/Chase. They are power houses for a reason and you should make sure you check their rates. Sometimes they are the best rate especially if they plan to hold your loan on their balance sheet.
Check some credit unions like PenFed and NavyFed as they sometimes are mis-priced (balance sheet many loans) or offer unique products (like a 5/5 ARM that only adjusts every 5 years).
Narrow it down to the best 3-4 lenders/rates. Tell them they are in competition and to provide their best, live rate when the time comes.
If the best rate is a less established lender that may be more difficult to work with, see if the established lender with the best rate will match their rate (Rocket/Wells Fargo/Chase). If within .25% they are likely to match.
7) Lock in the best rate. If rates fall meaningfully (~0.25% or more) between the time you lock your rate and closing, pressure the lender to drop your rate and threaten to back out if they don’t. Make sure there is ample time to switch lenders and get all the paperwork done before closing if you do switch lenders. You have to be savage!
CONGRATS! You just saved tens of thousands of dollars over the life of your mortgage!
Wrapping It Up and Next Steps
In this sixth installment, we hopefully helped you understand that mortgages are commodities and that everyone is looking out for themselves so you need to as well. Then we gave you a simple but effective 7-step plan to hopefully save tens of thousands in interest payments over the life of the loan.