The mortgage rates that banks offer are mostly set by market forces. Banks offer rates at their daily price and have marginal control over the cost of a given rate. The only way a bank can offer a lower rate than its “par," or no-cost rate, is to cut its profit. Due to laws regulating loan originator compensation, a bank loan officer has limited ability to negotiate a lower interest rate without management approval. The originator's compensation can't influence the borrower's rate.
How Mortgage Rates are Priced
Mortgage lenders publish rate sheets daily indicating the price to lock each rate. The cost for specific rates are charged to the borrower via “discount points.” A point is 1 percent of the loan amount. As an example, a 30-year fixed rate mortgage has 4.5 percent “par” rate. A rate of 4.375 percent may cost half a point, or .5 percent in discount points. Conversely, a 4.625 percent rate may yield a half-point rebate toward loan costs. While the rates and costs are based on market factors, banks have some leeway deciding what to offer their consumers in order to remain both competitive and profitable.
Effects of Dodd Frank
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that mortgage loan originators can only be paid based on loan dollar volume or number of loans closed, not on loan profitability. The rate the loan originator offers has no affect on that originator's pay check. The result of Dodd-Frank is that loan originators are encouraged to give consumers the best rate their bank allows. Although this reduces the ability to negotiate rates, it does make for more fair treatment of borrowers.
How Mortgage Rates are Pooled
It is easier to pay points to buy down the rate when rates are rising than when they are falling. Suppose 30-year fixed rates have risen from 4.25 percent to 4.5 percent. A bank may need more loans at 4.25 percent to complete its pool of securitized loans which it intends to sell on the secondary mortgage market. Thus, it may offer this rate at a good price. If rates rapidly fall to 4 percent, however, it will likely cost more to buy the rate down to 3.75 percent because the bank has not started making a pool of loans at that rate. Knowing these trends can help you to know when you have the leverage to negotiate your rate with the bank.
To Lock or to Float
Some banks prefer to lock in a consumer’s mortgage rate at the time of application. Other lenders like to wait until closer to closing. Although no set rule exists, generally banks that service their own loans lock earlier in the process. Shorter lock terms are cheaper. Longer lock terms and lock extensions typically cost discount points. If you are letting your rate “float” -- rise and fall with market rates -- you may have some negotiating room when you go to lock in your rate, especially if market rates rise.
With more than a decade of experience, Gregory Erich Phillips is a trusted expert on real estate and mortgage financing. As an author, Phillips is known for his writings on economics, personal finance, religion, politics and culture.