Bankers’ Hours: Rate may not be of utmost importance in a home loan
How important is the interest rate on a home loan to a borrower? Conventional wisdom, of course, dictates the mantra that rate is all, and the mortgage loan originator that can offer the lowest rate will fund the most loans.
And, of course, rate is vital after all: The higher the rate, the more rent you pay for the money. But it tends to be most important to a dramatically compressed segment of the borrowing public: those who qualify for, or whose property profile meets, the criteria of a Qualifying Mortgage, as defined by federal regulatory agencies.
Since the financial crisis, fewer loans qualify for the best interest rate, and those that do can feed at will from the QM trough, where interest cost is lowest. In this segment, after you wend your way through the typical lender’s pricing sheet, you find that there’s little difference in cost, since the lenders, in turn, feed at the Fannie/Freddie mortgage-backed security trough.
A few weeks ago, I had lunch with the vice chairman of a bank personally owned by the founder and chairman of the nation’s largest non-bank mortgage banker, with billions in loan servicing. This company has traditionally specialized in offering vanilla mortgages at a price just a tad below the competition. (Wait, don’t mistake me for some kind of mover and shaker. I happen to know the guy, and he invited me to lunch. Anyone who knows me knows that all you have to do is blow “free lunch” in my ear and I’ll follow you anywhere.)
This outfit is still touting price, and I suggested to a friend who’s been a mortgage banker/broker for some 35 years that he might want to consider signing up with them.
Of course he knew of the company, and had spoken to their account reps over the years. His response to me was revealing: “Rate isn’t that important to me.” What is, it turns out, are programs that accommodate the varied needs of his customers, as well as efficiency, communication and responsiveness in the underwriting and funding functions.
Yes, interest rates will get a lot more scrutiny when they rise, as they’re predicted to do in a few months. Higher mortgage payments will price a lot of people out of the home loan market, so there’ll be more consumer sensitivity to rate. But the borrower mix won’t change much over the near term. The cadre of highest qualified borrowers will remain relatively small, with billions in mortgage money chasing them, and the non-QM loan customers will be looking for a practical route to the closing table so that their loan funds on time.
This last group tends to turn to professional mortgage loan originators to help them find a program that works. The QM borrowers, on the other hand, can buy their mortgage pretty much off the shelf, without any help from a loan clerk.
The rate discussion is somewhat academic in the instance of a loan on a primary home because of GREED (the Great Real Estate Enhancement Deduction), which permits a tax deduction for home mortgage interest. The higher the income bracket, the less effect even a 1 percent increase in rate has on bottom line net disposable income.
So, the rich pay less in taxes if they pay more in interest, but they get a lower interest rate because they’re, well, rich. Lower income borrowers might find a program with a more lenient qualifying ratio, but they pay more for the money, and don’t get the same benefit from the deduction because they have less income to deduct from. That makes sense.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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