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Chicago Mort­gage Rate Quotes — Cur­rently Shop­ping Around?

SHOPPING CURRENT MORTGAGE RATES AND LENDERS

Whether buy­ing their first home or tenth home, con­sumers have yet to be given clar­ity on when and why to lock a loan.  The fol­low­ing infor­ma­tion will help pro­vide guid­ance on this issue.

THE BASICS: WHAT TO EXPECT TO GET A RATE QUOTE — REAL TIME OR MARKET AVERAGE?

Fun­da­men­tally, obtain­ing a phone/email/fax quote should only be used to deter­mine an approx­i­mate aver­age for rates and prices from var­i­ous lend­ing sources — at a given moment — and never a deter­min­ing fac­tor of when or with which source to lock and close the loan.  There are two pri­mary rea­sons for this.

1. The inabil­ity to lock the quoted price.  Unless a lender has obtained a fully exe­cuted pur­chase agree­ment, an autho­rized loan appli­ca­tion and loan approval (pre-approval with sup­port­ing doc­u­men­ta­tion from the bor­rower), the abil­ity to lock the quoted rate and price is not pos­si­ble due to prop­erty address and social secu­rity num­ber iden­ti­fiers needed to pro­cure any lock request (usu­ally online or through some type of auto­mated appli­ca­tion). This is an industry-wide requisite.
2. At any time sup­port­ing eco­nomic data (daily, weekly or monthly reports) is released, sub­stan­tial effects toward the mort­gage mar­ket pos­i­tively OR neg­a­tively will occur.  Pric­ing could change from the minute a rate quote was obtained by the consumer…to the minute after…without the bank, loan offi­cer or con­sumer real­iz­ing it.

Phone quotes or internet/print ads are good for get­ting a gen­eral idea of pric­ing accord­ing to when that pric­ing was pub­lished (usu­ally 10:30 am) but could have sub­stan­tial dete­ri­o­ra­tion or improve­ment either way since the ini­tial pric­ing was pub­lished.  Fur­ther expla­na­tion of this is in the next sec­tion  “under­stand­ing the markets”.

Lastly, pro­fes­sion­als such as Mort­gage Plan­ners, Attor­neys, Tax Strate­gists, CFP’s and the like, will need to obtain a rea­son­able amount of infor­ma­tion from any client to whom they will be quot­ing a price prior to the quote being given.  This is to ensure accu­racy and avoid lia­bil­ity through mis­state­ment from the professional’s stand­point.  Many lend­ing insti­tu­tions will quote inter­est rates with­out hav­ing any infor­ma­tion about a poten­tial cus­tomer.  What this essen­tially equates to are numer­ous assump­tions about the cus­tomer (usu­ally best case sce­nar­ios) being made by the lender and inac­cu­racy, at best, can likely occur.  The bor­rower should always be pre­pared to sup­ply gen­eral infor­ma­tion and autho­rize a credit check to obtain accu­rate quotes for pro­gram eli­gi­bil­ity, rates and fees.

UNDERSTANDING THE INTEREST RATE AND MORTGAGE MARKET — WHEN AND WHY TO LOCK OR FLOAT

Mort­gage rates are affected by the the day to day trad­ing of mort­gage bonds (mort­gage backed secu­ri­ties or “pass through” cer­tifi­cates) in the bond mar­kets.  This activ­ity of buy­ing or sell­ing MBS are based upon indi­ca­tors and infor­ma­tion dri­ven by eco­nomic, infla­tion­ary and fis­cal data com­ing out daily or weekly.  Since cur­rent mort­gage rates are based on real-time MBS mar­kets, the price typ­i­cally shifts up and down all day
long as with any other stock, com­mod­ity or secu­rity instru­ment on the exchanges.  Mort­gage rates pub­lished in the morn­ing can be 1/8th to 5/8ths dif­fer­ent (either way) by the after­noon depend­ing upon the level of volatil­ity in mort­gage bond trading.

Should you really try to time the mar­kets your­self? If you’re a pro­fes­sional bond trader, have access to real-time mar­ket data and finan­cial charts and can deci­pher cur­rent move­ment in those charts based on that data, expec­ta­tions of that data, what the data came in at… and to what degree it will affect bond pric­ing, then you likely have a strong grasp of when to lock in and can do so.  For most con­sumers, the clos­est they can come to tim­ing when to lock would be to call 10–15 lenders per day, every 30 min­utes at a min­i­mum.  Even then, they will not be able to know for cer­tain if lock­ing or float­ing is the right posi­tion to con­cede.  Retain­ing a trusted mort­gage pro­fes­sional with access and insight to this key infor­ma­tion will obtain clear and con­cise results with­out the stren­u­ous effort involved on the consumer’s part.

For illus­tra­tive pur­poses on how a pro will help the con­sumer cap­i­tal­ize on the best pos­si­ble price at the right time in the mar­ket:  As we watch/listen and view data — xx bps in adjust­ment would lead to intra­day repric­ing one way or the other… and we under­stand the bear­ish or bull­ish rever­sal trend may be just tem­po­rary… check­ing what floor of sup­port and ceil­ing of resis­tance impedes move­ment... and then how to han­dle it with­out any risk of the con­sumer los­ing a good peak in rates and us being able to secure the lock-in at the right moment. Gen­er­ally, only expe­ri­enced mort­gage plan­ners and MBS traders can dis­cern what is or is not risky in terms of locking.

Exam­ple of food for thought:  If the clos­ing is not for a month or so
out… and the mort­gage plan­ner knows vir­tu­ally for cer­tain
pric­ing will improve prior to clos­ing… why would any­one lock now? Is a rate quote today even rel­e­vant?  No, the quote really is not even rel­e­vant and the loan prob­a­bly should not be locked under most cir­cum­stances.  For vise-versa’s sake, should mort­gage rates likely worsen, a pro­fes­sional would advise not to float and likely lock in at the ear­li­est pos­si­ble chance.  Experts will watch closely and
lock in at the best pos­si­ble time for the client.  The fol­low­ing chart illus­trates MBS move­ments. copy­right MMG, 2007.

FINAL ADVICE FOR RATE SHOPPING

Advice and qual­ity does have its price.  Money, itself, is the com­mod­ity.  How­ever, the indi­vid­ual whom sup­plies the money to you after a thor­ough solution-providing analy­sis, is not.  The ques­tion one needs to ask in mak­ing a deci­sion to work with a pro­fes­sional is: Who has taken the time to edu­cate, pre­pare, and answer client’s ques­tions?  Who is cer­ti­fied and demon­strated a way to help the cus­tomer save 5 to 6 fig­ures over the course of the rela­tion­ship?  Hag­gling over a quar­ter (.25) per­cent in rate could keep a con­sumer from find­ing and work­ing with some of the most elite pro­fes­sion­als in mort­gage bank­ing; the kind who really can make a dif­fer­ence in people’s lives.

Think of it this way:

A con­sumer holds an account with Bank A.  Bank A pays 6% inter­est on a sav­ings account.  Bank B, the com­peti­tor, will pay 6.25% in their sav­ings account.  Clearly, this is not enough of a dif­fer­ence to close the account with Bank A, go through the due process open­ing a new account with Bank B and trans­fer unknown respon­si­bil­ity and ser­vice to cap­i­tal­ize on .25% (a quar­ter of one per­cent) addi­tional growth.  The same holds true in BORROWED funds and debt.  Find­ing a com­pe­tent pro­fes­sional to han­dle all aspects of home acqui­si­tion and clos­ing process cer­tainly is much more valu­able than attempt­ing to secure .125-.250% bet­ter in bor­rowed cost (the inter­est rate), restart the appli­ca­tion process, sub­ject one­self to tim­ing the mar­ket to lock in, spend more fees etc.  Cer­tainly, a lender could not be 1–2% over the aver­age mar­ket inter­est rates and be com­pet­i­tive.  .375% or less in dif­fer­ence of note rate from one sce­nario to another is a min­i­mal cost to have cer­tainty in clos­ing the deal.

RESEARCH

This is an impor­tant com­po­nent of any large finan­cial trans­ac­tion.  The home is one of, if not the largest, finan­cial invest­ments a per­son will make in their life­time.  Given the impor­tance of the home invest­ment and loan oblig­a­tion, work­ing with a pro­fes­sional that knows his or her indus­try is para­mount to suc­cess in debt accre­tion, tax­a­tion con­trol and equity management.

When shop­ping, the fol­low­ing ques­tions should be asked of poten­tial mort­gage pro­fes­sion­als to assure the con­sumer that the mort­gage pro­fes­sional answer­ing these ques­tion indeed has a han­dle on his or her indus­try and, directly, the consumer’s best interests.

• What are inter­est rates based on? Mort­gage inter­est rates are based on the yields of Mort­gage Backed Secu­ri­ties (pass through cer­tifi­cates) or Mort­gage Bonds.  These bonds are bought and sold daily by large investors.  Bond prices, just like stocks, fluc­tu­ate by the minute.  Mort­gage pro­fes­sion­als like to see bond prices ris­ing.  If your mort­gage lender states that rates are based on Fed Funds rates, the Prime Rate or Trea­sury rates (10 yr note), they are mis­taken and this should be a cause for con­cern.  (While the 10-year Trea­sury Note some­times trends in the same direc­tion as Mort­gage Bonds, it is not unusual to see them move in com­pletely oppo­site direc­tions.  DO NOT work with a lender who has their eyes on the wrong indi­ca­tors.  How can you be cer­tain to lock in at pre­cisely the right time?)
• What’s the next eco­nomic report or event that may cause inter­est rates to move? Bond Mar­kets are con­cerned with the pace of eco­nomic growth and
  infla­tion.  Gen­er­ally speak­ing, mort­gage bonds move oppo­site the stock mar­ket.  So as the stock mar­ket improves, mort­gage bonds gen­er­ally drop in price (bad for inter­est rates).  The mar­kets move accord­ing to var­i­ous data and reports com­ing out on a daily or weekly basis.  Stronger or weaker than expected data can instantly shift the mar­kets for bet­ter or worse.  We have the abil­ity to know which data to look­out for and what action to take accord­ing to the out­come of that data.
• When Bernanke and the Fed “change rates”, what does this mean… and what impact does this have on mort­gage inter­est rates? The Fed­eral Reserve Bank only con­trols the Dis­count Rate and influ­ences the Fed Funds Rate, com­po­nents of short term rates and the Prime Inter­est Rate.  This is very dif­fer­ent from mort­gage rates.  A mort­gage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another.  Again, the mort­gage bond mar­ket con­trols mort­gage inter­est rates.  In fact, very often mort­gage rates travel in the oppo­site direc­tion of the Prime Rate. (On the day of the Fed move, Mort­gage rates most often will actu­ally move in the oppo­site direc­tion as the Fed change. This is due to com­modi­ties, stocks and bonds com­pet­ing for the same dollars.
• What’s hap­pen­ing in the mar­ket now and should I lock or float? There is more than suf­fi­cient mar­ket infor­ma­tion on a daily basis that allows a mort­gage
  pro­fes­sional to rec­og­nize trends and to act accord­ingly.  For instance, as noted above, if the employ­ment num­bers are to be released tomor­row and you are not locked in on your inter­est rate for your new mort­gage loan, it would be imper­a­tive that the proper research be done to ana­lyze poten­tial mar­ket direc­tion and deter­mine whether to lock or float your inter­est rate.  A response such as “Gosh, if I could pre­dict the future I wouldn’t have to work for a liv­ing” would be a red flag that your mort­gage pro­fes­sional is not engaged in their indus­try.  Again, I am an expert at mort­gage mar­ket con­di­tions and can lock in when the time is exactly right.