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Understanding Mortgage Rates
Today’s Rate is Always Fluctuating
One of the most common questions we get from potential clients is “What is your rate today?” The true answer is that there is not just one interest rate available for any given day. At any time, our rate sheet may fluctuate from 2.0% all the way to 6.5%.
General Profit Targets Vary Between Lenders
How is this kind of fluctuation possible? For starters, it is important to understand that every lender operates with a general profit target for any loan they originate. This profit target, sometimes referred to as the “price,” varies between lenders and is typically expressed as a revenue percentage.
For example, many companies want to earn about 2% of the loan amount on each loan they originate (SmartMortgage’s target is lower which allows us to offer you a better deal). Lenders will offer you any interest rate you want as long as they are able to hit that 2% target.
Banks are paid different revenue percentages at each 0.125% increment on the rate sheet. For example, a 4.25% rate may pay the lender 2%. In this case, they could offer this rate without charging any lender fees. Conversely, if you wanted a lower rate, say 4.0%, that rate may only pay the lender 0.3%, which is way under their 2% target. In this case, you would need to pay the difference – this is sometimes called paying ‘points’.
Finally, if you needed help paying your closing costs, you could take a rate higher than 4.25%. 4.5% may pay the lender 3.5%, which would allow them to take out their standard revenue requirement and provide you a 1.5% credit toward your other closing fees. At the far ends of the rate spectrum, 3.0% may require that the lender charge you 10% in fees! Likewise, 6.5% may allow the lender to provide a very large credit toward your costs. Most people choose an option in the middle.
In all of our quotes we will offer different rate/fee combinations so you can choose the option that works the best for you! Our profit targets are much lower than most other lenders which is why we are able to offer our services at such low overall rates and fees.
The information provided on these posts have been prepared by a third party company and have been distributed for education purposes only. The positions, strategies or opinions of the authors do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax adviser for full eligibility requirements on tax deduction.