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Understanding your mortgage rate

Most people are not loan officers and have little knowledge of how interest rates even work. Even if your math skills do not go much beyond multiplication and division, it will help you to understand mortgage rates from the loan officer’s point of view.

In an article released by Terry Light and realestateabc.com, “Mortgage rates and pricing,” will give you a glimpse of what the mortgage company receives off your rate and why they offer certain loans.

It is amateur to call up a mortgage company and ask them for today’s rate. While national rates often change, the rate offered usually depends on the broker and borrower’s financial situation.

“Every morning a loan officer gets a rate sheet - or a number of them. Mortgage bankers get the rate sheet from their company. Mortgage brokers get rate sheets from a number of wholesale lenders.”

“These rate sheets are not designed for public view. They are for loan officers' eyes only because they represent the "cost" of a loan to the loan officer, not the cost to the borrower.”

The article presents a table of sample loan rates versus cost. A loan with an interest rate of 6.25 percent will cost the loan officer two points, or two percent. While a loan with an interest rate of 7.25 percent will actually credit the loan officer and branch 2.375 percent of the loan since the rate borrowed is so high.

“Different rates have different costs. Higher rates don't cost as much as lower rates. This is because the lender is going to earn more in interest over the life of the loan, so it makes sense to charge less. Conversely, it makes sense to charge more for a lower interest rate, because the lender will earn less interest over the long term.”

All loan officers are paid on commissioner. They split their fees with the branch they work for. Selling loans with higher percentage rates will make both officer and branch more money, but they do not want to appear greedy because this would tarnish their image and cost them clients.

“Before quoting you an interest rate, the loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on how little that can be (the minimum amount the loan officer adds on to his cost) but does not want to overcharge borrowers either (so they set a maximum the loan officer can charge) Between that minimum and maximum, the loan officer has a great deal of flexibility.”

When you call a loan officer and ask for a rate, he or she will automatically add a pre-determined percentage, or point, to your quote. Say for example, the loan officer and branch pre-determine that they want to earn one point off your loan. A loan with an interest rate of 7.125 percent typically credits the officer and branch 1.5 percent of the loan.

“In our example, at 7.125% the loan officer and branch would earn one point and have some money left over. This could be used to pay some of the fees (processing, documents, etc), which is how you get a "no fees -no points" mortgage. You just pay a higher interest rate.”

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