Mortgage rates seem to always be in the news. These days, information travels fast and everyone seems to be an expert about everything, since they can just Google any topic. The trouble with all this information flying around constantly is that much of it is inaccurate or out of date. This is especially true with the internet and media and their reporting on MORTGAGE RATES.
Let’s look at some common statements that are either completely false or not entirely accurate.
****Mortgage rates are based on the 10 year treasury – Wrong! We hear this all the time from people who are supposed to be experts, but they still cannot get this right. Mortgage rates are directly related to the price of mortgage bonds, also called mortgage-backed securities (MBS). Treasuries and MBS most of the time move in similar directions, since they are both bonds, however it’s not uncommon for treasuries and MBS to move in opposite directions.
Below is a screen shot of mortgage-backed security bond trading that we use to track the movement of bond prices to see where rates are heading. There are many different technical factors on this chart that the average person might get confused with, so I will spare you the nerd talk and put this in simple terms. The easiest way to read this chart is “green is good” and “red is bad”.
As the price of a bond rises, yields (rates on mortgages) will fall. Inversely, if bond price goes down, rates must rise. Lenders & banks adjust their rates daily based on these bond prices. It’s also not uncommon that on very volatile days, rates may change multiple times in a day. This is why rates are a moving target for everyone. It’s never set in stone until the rate is locked.
****Freddie Macs weekly survey says 30 year rates have fallen this week – This could be right or completely wrong. The survey is completed Monday-Wednesday each week, with the surveyed lenders sending in their rate quotes whenever they please, as long as the quote is delivered by Wednesday evening. The results are averaged and then issued to the public on Thursdays. So, by the time the report has been issued on Thursday, rates could have improved or worsened every day and since data is collected on Monday, Tuesday and Wednesday at all different times of the day, the averaged data is highly likely to be inaccurate. These are also still merely quotes, so this is only what the lender would quote at that exact time on that exact day to a borrower who met certain criteria. If that same lender had delivered the quote at a different time on that day or on the next day, it could be a completely different quote. Again, these are quotes, not confirmed rates that were actually locked and settled.
These rates quotes from the surveyed lenders make the following assumptions:
- Conventional loans only
- The customer is paying an average of .5 points to obtain that rate
- The lock period is based on 30 days only
- 740 or higher credit score for all applicants
- Loan to value of 80% or less (on a purchase that means no less than 20% down)
- Conforming loan amounts only (based on county limit)
- Single family 1 unit home (not condo) (not 2-4 unit)
The Freddie Mac survey does give the general public some information as to the trend of mortgage rates from week to week, but as we already established, their data is compiled over several days, making a lot of the data inaccurate by the time the rate average is broadcast to the general public. On many occasions, I have heard the news on the radio saying that rates fell this week according to the Freddie Mac survey, when in fact they were actually higher than at the start of the week.
So, if you are trying to figure out why the rate quote you received from your lender is different than these numbers that you hear thrown around online or in the news, you can easily see that the news/media that you are using for comparison purposes is not an accurate place to get your information.
The news link below is a perfect example of what anyone can view online from the Freddie Mac website. This information really needs to be broken down so that the average person can understand how to decipher this and to see how easily this information can be misunderstood.
First of all, the majority of banks price their mortgage rates in increments of .125%, so when you see a number like 3.95%, you can be fairly certain that the number is an average or merely a marketing tactic. Let’s decode & critique this website info here below:
Actual reported news online: 30 year mortgage rates fell 7 basis points from 4.02% to 3.95%.
Decoded: This actually means that rates fell from around 4% to still around 4%. 3.95% is still essentially 4% and 4.02% is still 4%. The news leads everyone to think rates really fell, but in fact, they did not really move at all.
Actual news reported online: 30 year mortgage rates fell 7 basis points this week in a delayed reaction to last weeks sharp drop in Treasury yields.
Decoded: Treasuries do not directly impact mortgage rates. Even this website is getting it wrong, which baffles me. Mortgage rates are only affected by MBS as we have already established.
****The Federal Reserve sets mortgage rates – This is only partly correct. The Federal Open Market Committee or better known as the “FOMC” or the”Fed” does not set mortgage rates directly, but they do set the Federal Funds Rate. This is the rate that banks charges each other to borrow funds overnight. Any time that the Fed changes the fed funds rate, many other lending rates and indexes move in lockstep, meaning they move up or down by the same amount. This includes the Prime rate, which directly impacts home equity loans, car loans and personal loans. As the fed funds rate rises, borrowing costs for consumers across the board rise. This does not directly impact MBS and mortgage rates, however, the reaction of the market could have a negative or positive impact on the price of MBS and mortgage rates. Since investors typically purchase bonds (Treasuries, MBS, etc.) when there is a flight-to-safety out of equities (stocks), the news, economic reports, or even just an announcement by the fed can indirectly push mortgages rates in either direction at any time.
****My credit union or online lender is offering a lower rate – This is something that we hear all the time. At the time that we hear this, we likely have already provided the customer with a fully itemized mortgage estimate based on their loan option preferences. The customer in many cases may have found some mortgage rates listed online for a program with a similar name and then they assume that the lower rates online are what they should qualify for. Then, we take the time to explain why comparing our estimate to those online rates is not an apples to apples comparison.
This first example is of an extremely popular credit union, who shall not be named. On their website, they list rates for different loan programs and typically the rates they list would be considered “below market”, if they were offered without the customer having to pay extra for that rate. On their website today, the 30 year fixed conforming loan that they advertise has a rate of 3.625% with .875 points being charged. For a $400,000 loan amount, the customer is paying an extra $3,500 in closing costs to to obtain that rate. That doesn’t sound too bad right? Wait, there is more…. If you look a bit further, you also can see that farther down on the website in tiny print, those rates also assume that the customer pays a 1% origination fee as well. So, now the customer who applies for that loan and rate will need an extra $7,500 in cash to settlement.
Another fun little tidbit about their online rates is that they also based them on a 30% down payment for purchases. So, if you’re not planning on a 30% down payment or more, you are not eligible and your rate would be much higher. You would have to call into their large call center and wait for one of their young call center operators to take down all of your information and then you could hopefully find out how much more the mortgage would really be. That’s if they actually send you an estimate at all when you apply.
The second example has to do with one of the very popular online lenders that do a lot of t.v. advertising. We will not mention their name, but there are a few online lenders out there like this one, who advertise that all you need to do is push a button on your cell phone and you are instantly approved for a mortgage. At this time, I won’t even discuss the issues with their business model. Instead, I’ll focus just on the rate quotes and online rates they advertise.
Recently, a customer said that he was going to switch to an online lender who quoted him a lower rate of 3.875% vs. our rate of 4.125%. What he failed to mention or realize is that this rate that he was quoted was not all it was cracked up to be. When he was directed by us to click on the list of assumptions associated with this quote, he found out that the quote was based on 25% down, a 740 credit score and paying 2.25 points at closing. In fact, he was actually trying to obtain a loan with 20% down, he had a 739 credit score and we were not charging him any points. Before we saved him, he was about to pay thousands of dollars more just to save around $30/month, which would take close to 10 years to break even on.
These examples are very common, but they can be avoided. When you are rate shopping or comparing lenders, just be sure that you are comparing apples to apples. At any given time a comparison of rates could be .125% different depending on when each estimate was prepared, but if one rate quote is much lower, there is likely something else going on that has not been disclosed yet and buyer beware.
The best policy is to make sure you are working is a full time local reputable lender. This will insure that you can get actual make-sense rate quotes and estimates whenever you need them and you can avoid all the hassles and issues with those online companies and credit unions.
I hope you found this information to be useful. Please add comments or questions or you can contact us directly for additional clarification on these subjects at 240-670-5090 or email@example.com
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