In deciding mortgage rates mortgage lenders don’t have prospective homebuyers’ best interests at heart. Loans, after all, are products and mortgage lenders are salespeople pushing those products, whether they’re right for a specific homebuyer or not. Lenders typically earn a one percent commission on each mortgage or mortgage refinancing they successfully process as well as additional points, called overages, if they can convince homebuyers to go with a loan higher than average current mortgage rates.
It’s not unheard of for unscrupulous lenders to delay processing a loan if current mortgage rates are rising and the end of a 60-day interest lock-in rate is fast approaching. While mortgage brokers themselves aren’t directly regulated by a federal agency, the Federal Trade Commission has taken action in the past against companies routinely engaging in this questionable practice.
Lenders use APRs (Annual Percentage Rates) when they promote mortgages or mortgage refinancing in order to give prospective homeowners an accurate estimation of the loan’s annual cost to them.
However, every lender calculates the APR in a slightly different way. One lender may include application fees in the APR calculations, while another lender may not. Additionally, APRs differ according to the size of the loan, whether interest will be assessed at a fixed or variable rate, and insurance required. Homeowners may end up paying different amounts on two loans both advertised at an APR of 3.5 percent.
Mortgage rates have a tendency to get lifted on Friday regardless of whether the market calls for it or not. Avoid locking your rates on any Friday. Mortgage rates are loosely tied to other fixed rate investments like Treasury bonds. US Treasury bonds are believed by the markets to be “as good as gold” or risk free to say it another way. So when investor fear putting their money anywhere else (ie. stocks, commodities, etc.) yet still want to earn a return however meager, they buy Treasury bonds.
If the demand for bonds is high, the rate the bond pays drops. If the rate bonds pay drops, so does the rate mortgage backed securities pay…and even thought it’s not quite that simple, mortgage rates come down.
The reason Friday seems to be a day the bankers “forget” the market is because they don’t know what the weekend will bring. If there is “good” economic news made over the weekend like a good jobs report or exports are up, investor will want to dump the bonds and move to stocks or commodities. This will mean rates will have to be raised and it’s seems they all think that it is better protection if they do that on the previous Friday.
Say we turn on the news to find out that there is an oil spill, tsunami, or earthquake that just occurred. This will impact mortgage rates almost immediately.
What will happen as you’ve probably already guessed is rates will improve. When investor move their money out of risky investments and into US Treasury bonds this is call a “flight to quality” or a “flight to safety”. Look for any big negative news story to trigger a flight to quality and take advantage if you can. Many investor like to wait out the negative events by sitting on the sidelines…and moving their funds from stocks to bonds is how they do that.
Locking before versus after a “flight to quality” could be costly. I’ve seen a half a percent in the rate difference in the past. Nobody likes disasters but you will have this mortgage for many years and a .5% rate drop could save you $10,000′s in needless interest if you simply stay abreast of current events and know the trends.
So if you get an urgent phone call from your loan officer begging you to lock in a rate right now, click over to Bloomberg or CNBC and find out what the stock market is doing. You may find more often then not, stocks are on the upswing. He maybe trying to get you to lock the worst possible time.
On the flip side, if you tune into the stock market (which you should be doing daily if you have an unlocked loan in process) keep your eye out for the opposite occurring. Say the DOW is falling like a rock your loan officer will not call you! You will have to call him.