Is There Really a Mortgage Dartboard?

Pile of cash

Mortgage rates fluctuate every day

You probably know that mortgage rates change every day. If the market is volatile, lenders may even change their prices a couple of times during the day. There is a reason for this—and it’s not because some banker is throwing darts at a rate chart.

Here’s how it really works.

You have survived the ordeal of getting your loan approved. You have signed your name a thousand times on a two-foot stack of forms and have terminal writer’s cramp. A couple of days after this, feeling starting to return to your fingers and your loan officer calls and says, “Your loan has funded!” This means that the lender has wired your money to escrow and your transaction is complete. Your Realtor© hands you the keys to your new home.

Shortly after, even before you have unpacked your coffee maker, you get a letter telling you that your loan has just been sold. Huh? Is this some kind of fiscal “Dear John” letter? After all you’ve been through, the bank wants to dump you?

Cheer up—it’s just the way mortgages work. When your lender funded your loan (wired the money into escrow), they drew from a specialized line of credit called a “warehouse line.” After escrow closes, the lender presents the paperwork for your loan (most importantly the Promissory Note and the Deed of Trust) to an investor, who pays them cash for your loan. They will pay more for the loan than its face value, so your lender will make a small profit on the loan. From the cash they receive, they will pay down the warehouse line (freeing it up to make more loans), cover their overhead and make a bit of net profit.

That is the business mortgage banks are in. The investors, like Fannie Mae and Freddie Mac, will get their return over a longer period of time, as you and millions of other homeowners make your mortgage payments.

All these mortgages are bundled together into a type of bond called a Mortgage Backed Security. These bonds are bought and sold on Wall Street, and the price fluctuates according to what is happening in the market. Lenders decide what they will charge you for a loan on a particular day by seeing what cash price they can get for your loan at that time. You should be aware that all mortgage lenders will get the same price for a mortgage at any instant in time. No lender has an “inside track” where they get more for their loans than anyone else.

It is important for you as a consumer to realize this reality of the market: all lenders are in the business of selling their loans to the investor at a profit, and they will all get the same price at any instant in time. No one has a special deal where they can get a higher cash price, and therefore offer much lower rates than anyone else. If one lender has rates that are lower than others, it is because they choose to make less profit on each loan. While there are bargain operators who work on very slim profit margins, you should decide whether that “bargain” lender will actually be able to fund your loan when the time comes. Mortgages today are much more complex than they were a few years ago, and it often takes a highly experienced loan officer to deal with the inevitable twists and turns of the transaction. In mortgages, as in other aspects of commerce, caveat emptor is the word of the day.

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