If you have been looking to refinance your home loan now might not be the time to do it. Ok, I know this is contrary to the mainstream narrative when it comes to refinancing. Most people are hearing that now is the time to act as rates are at historic lows, if you have heard this you are hearing the narrative. It is true that interest rates are low, however, rates still should be lower. There are many reasons why I say this, and I will get into it in this blog. The biggest problem with lending today is not interest rates it is turn times and bottle necks in the industry.
It is true that interest rates are low, however, there are still parts of the rates that are not figured into the price of the interest rate. What I am telling you is that for most all Government loans, FHA and VA loans, there is a piece of the puzzle missing in the price of the rate. The price in the rate refers to the discount points. Before it was announced that you could take a pause or defer your mortgage payments during the pandemic the pricing on Government loans was considerably better. The best way to explain why is to show you behind the mortgage curtain, if you will. You see when lenders sell a mortgage in the secondary mortgage market to Fannie Mae, Freddie Mac, or Ginnie Mae (the Agencies) lenders will retain the servicing of the loan. What that means is that a lender will need to re-capitalize their money reserves by securing the mortgage with one of the above agencies by selling a portion of the yield to one of the Agencies. In other words let’s say you have a 3.5% interest rate on a loan (to make it simple) the lender may sell the loan to one of the agencies guaranteeing them a 3% yield. They then will keep the .5% to collect the payments from the borrowers and send the 3% to the agency they sold the loan to. What happens when borrowers stop making their payments? Well the lender still has to make those payments to the agency they sold the loan to. Thus, lenders will lose money on servicing loans during the pandemic. So, to offset this a lender will have to raise their rates to offset the losses in their servicing departments. It is more complicated than that but for simplicity that’s what’s going on with rates and pricing.
Thus, when people start making their payments again, on a regular basis, lenders will then be able to adjust their pricing on their interest rates back down. Interest rates are still artificially high although they are still low, if that makes sense. I am not saying when the pandemic is over that rates will automatically go down, however, in a normal world they should. Lenders might like the increased profits they are receiving from the higher upfront interest rates and fees. This is all new territory for everyone so to say this is the “new normal” and that it will be this way is confusing as I have done pricing before with a Mortgage Banker so I know how it was done. It may never go back to they way it was but competition is the key to lower rates and without it lenders could set interest rates and profit margins like OPEC with oil prices. This activity is illegal in the United States, however, everything has changed and that too might be a “New Normal”.
To add insult to injury, turn times on loans have slowed to a nauseating pace. If you are in the middle of trying to get a home loan whether it is a purchase loan or a refinance you are experiencing this. I have talked about this before in prior blogs but is has gotten worse with the increases in loan volume. You see the large lenders have not been able to get back to their work spaces yet and some are working from home and others from the office, so we are seeing that the right hand often doesn’t know what the left hand is doing so the time to do simple tasks like sign off conditions are taking 2-3 times longer than before the shutdown. This has impacted refinances and purchase transactions by adding an additional week or two or more, in some cases, to the process. We have also seen signing agents (Title companies and Escrow companies and Lawyers on the East Coast) taking longer to do their jobs as their offices have not opened to full capacity yet either. All this change has hampered the whole process of getting a home loan. It is frustrating to clients but to us that have always strived to hit our target closing dates on time it has been a real challenge. This will change in time; I can’t tell when as we seem to all be at the mercy of our local and state governments as to what can open and when and more importantly how they can open. Until the world figures out how to fight this pandemic and how to govern during this time we will continue to see change in the Home Loan industry. We are always here to assist you and give you the honest truth to what is going on in the industry. Please call us at 916-672-6130 we are here to help.
Ok we are a little over 2 months now since California shut down (March 16) so what is going on with interest rates? Interest rates are great let’s just start there. Interest rates are in the low 3’s and high 2’s currently. So what is driving interest rates, you would think the answer would be easy, however it is far from easy. There are many different factors that will determine what your interest rate will be and it will vary from person to person based on there credit scores, down payment or equity, cash back verse no cash back, loan size, loan program, fees waivers, and list goes on. If you hear an advertised interest rate that is really low it probably does not pertain to you or what you would want from your home loan. Interest Rates are also geographical meaning that depending where you live in the United States will determine your base interest rate. So how are rates calculated and how do they vary from lender to lender.
First lenders across the nation give California a little higher interest rate than the rest of the nation to begin with. This is due to the fact that California home loans tend to pay off faster than other parts of the nation. This affects interest rates in that the longer a borrower will hold on to their current mortgage the more interest a lender can accumulate over time. In California people tend to move more often that other parts of the country making the amount a lender can make on interest over time less so in order to compensate they raise the initial interest rate a bit. So if you are hearing, on the news, that interest rates across the nation have come down and they give you an average rate you can rest assured that California will be on the high side of the curve.
The next determining factor or factors that determine the interest rate you will get is your credit score(s). When a lender is pricing your loan, they have to use the low mid-score of a married couple and the mid credit score if you are single. When your Loan Officer (MAE Capital Mortgage) prices your loan with lenders across the country we will have to have your credit score and the amount you are putting down and other factors in order to get the rate that fits you specifically then we will shop for the best loan scenario. It also makes a difference if you are choosing a mortgage that will pay off bills in other words if you take cash out of the equity of your home on a refinance it will also increase the interest rate a bit. When you hear a lender advertising that they will pay off all your bills with a refinance know that is costing you a little bit more to do that. I would not discourage this just be aware of the increased costs even if you have 800+ credit scores the interest rate will be a bit higher.
If you are one of those who love to shop around to find the best interest rate you had better be prepared to give your exact credit score, down payment or equity position that is accurate as a bare minimum. Here at MAE Capital that is exactly what we do on every one of our loans as we are Mortgage Brokers that hold both a California Department of Real Estate License as well as the National Mortgage Licensing System (NMLS) license in order to be able to offer rates from lenders across the nation. Not all lenders are created equal so be aware that rates will vary from mortgage company to mortgage company and that has to do with their overhead requirements. The more people a lender has to employ the higher the cost for that lender to originate a home loan. A Mortgage Broker will have less overhead, in most cases, than a Mortgage Banker or a Bank who will underwrite and fund their own originated loans. The reason why a Mortgage Broker will have lower rates is the fact that they can shop the entire nation for lenders with the best rates and programs where Banks and Mortgage Bankers will only have their own set programs offered by there company. Mortgage Brokers also get what is called a wholesale rate verses a retail rate and that low rate is pushed to their/our customers.
The type of loan you choose will have a different rate than other loan types. A loan type is a FHA Loan, Conventional Loan, VA Loan, Jumbo Loan, Non-traditional loan, Private Money Loan, USDA Loan, CALHFA Loan, and more. All of these loans will have different rates associated with the risk they carry the higher risk loans, such as Private Money or Hard Money Loans carry the highest rates. Again, if you hear an advertisement for an interest rate or program know that what you hear is not what you will actually get, in most cases. For example; we have a lender that we sell loans to that has a program out now that has interest rates in the 2’s, but you have to have the perfect scenario in order to qualify for that program such as 750 mid credit score down payment or equity greater than 20% of the value or purchase price of that home, if you fit the parameters you win and get the rate. But if you are trying to take cash out of your home to pay bills off then suddenly you don’t and most people only hear what they want to and when they hear rates are in the 2’s they tend to pick up the phone and call around. Another factor that is currently changing the interest rates is the fact that many people have listened to the media and have stopped making their mortgage payment during the pandemic this not only hurts them but it hurts those with good credit and never being late on a mortgage. With people not making their payments during this pandemic it is hurting those that are, and are making higher interest rates. You see lenders have priced in the profit from collecting mortgage payments for the origination of a new loan before the pandemic and now they simply are not so we are experiencing higher rates because of this. One phone call to MAE Capital Mortgage Inc. and we will be able to run your credit while we have you on the phone and will be able to give you an accurate interest rate. I hope this blog helps people to navigate through all this and we are here to help. Give u a call to get your pricing today at 916-672-6130.