I am continually surprised by a common type of post I see in the WCI Facebook Group asking what the best mortgage rates are. They typically look something like this:
Or this
Or this
Or this
I wonder what people did before Facebook existed. Did they ask their co-workers around the water cooler if any of them had refinanced lately, how to refinance and what rates they got? It just seems bizarre to me to even ask the question. I mean, if you want to know what mortgage rates are currently available in your state, you could try Dr. Google. She is very good at stuff like that. Let me show you what I mean.
Mortgage Rates Change Daily
See what I mean? In less time than it takes to type in a Facebook post, you can have up to date information at your fingertips. Mortgage rates change twice a day. So someone else's experience last month or even yesterday is already out of date. Look at the “rate last week” column above. See what I mean? This stuff changes so frequently that nobody else's experience is even relevant to your situation.
You Can't Just Compare Mortgage Rates
Now here's another reason it is just silly to ask your co-workers or fellow Facebook group members about their mortgage interest rates. There are three variables when you get your mortgage, even if you are comparing the exact same kind of mortgage in the exact same city on the exact same date. There is the interest rate, the fees, and the points. If a mortgage lender sees that all you care about is interest rate, he'll give you a low-interest rate and make up the rest of his profit on the fees and points. Only an apples to apples comparison is useful at all. It reminds me of the old accountant joke:
A businessman was interviewing job applicants for the position of manager of a large division. He quickly devised a test for choosing the most suitable candidate. He simply asked each applicant this question, “What is two plus two?”
The first interviewee was a journalist. His answer was, “Twenty-two”.
The second was a social worker. She said, “I don't know the answer but I'm very glad that we had the opportunity to discuss it.”
The third applicant was an engineer. He pulled out a slide rule and came up with an answer “somewhere between 3.999 and 4.001.”
Next came an attorney. He stated that “in the case of Jenkins vs. the Department of the Treasury, two plus two was proven to be four.”
Finally, the businessman interviewed an accountant. When he asked him what two plus two was, the accountant got up from his chair, went over to the door, closed it, came back and sat down. Leaning across the desk, he said in a low voice, “How much do you want it to be?” He got the job.
Seriously, this is the way interest rates work. What do you want the interest rate to be? Want it to be super low so you can be the envy of the Facebook Group? Pay two points and a gazillion fees. Want it to be so high that not only do you not have to pay any points or fees but they give you cash back at closing? They can do that, too. Don't believe me? Ask the lender to show you her rate sheet that details all this stuff. You can pick your mix of points, fees, and interest rate. They're all set up so that the lender makes about the same amount of profit no matter what you choose. Here's an example of a part of a rate sheet from a mortgage lender:
As you can see, to lock in a 2.625% mortgage for 30 days, you'll need to pay 1.040 points. However, if you're willing to take a rate of 3.750%, they'll pay YOU 1.300 points. You can use that money to pay your fees and maybe even pay down your loan a bit.
Perhaps the easiest way to do an apples to apples comparison is to have lenders quote you a no-cost rate, i.e. a rate where you pay no points and no fees. This rate is obviously going to be higher than what they can give you if pay points and fees, but it does allow you to compare apples to apples. Remember that “no-cash” is not the same as “no-cost.” With a no-cash mortgage, the points and fees are rolled into the loan. With a no-cost mortgage, the points and fees are paid by the lender.
Now, do you understand why it really doesn't make any sense to ask other people what rate they got for their mortgage?
How to Get the Best Mortgage Rate
First, determine that you are actually in the market for a new mortgage. If you are buying a house and do not have the cash for it, then you are in the market for a new mortgage. If you are considering refinancing and the rates you see on a quick Google search are significantly better (often defined as 1% lower) than your current mortgage, then you are in the market for a new mortgage. It is now time to get serious.
Pick two lenders. Get a quote from each of them the first thing in the morning. When you get both quotes, go to the lender with the higher one and tell them about the lower one and ask if they can beat it. If they can, then go back to the other one and ask them to beat the new offer. Repeat until they both refuse to give you a better deal. If you're really paranoid, do it with three or four lenders instead of two. Before noon you will have been offered the going rate and fees for your new mortgage. If you like the service you have been getting, lock in the rate and move on. If you want to skip this process, hire a mortgage broker to do it for you.
Seriously, that's it. It's not that complicated. It works just fine whether you are using a physician mortgage or a conventional mortgage.
What do you think? How did you shop for your mortgage? How did you ensure you were comparing apples to apples? Did you use a broker? Why or why not? Comment below!
Simple concept that’s seems complex for those not used to going through it.
Just started on my direct real estate investing journey, finding competitive mortgage products is something that I’ve gotten used to. It’s the same process and strategy that you describe. A few quick calls gets you all the answers you need to make a decision.
The Prudent Plastic Surgeon
I recently shopped for mortgages. I appreciated the WCI Facebook posts and comments about best rates available. I contacted about 15 lending companies- local, small credit unions as well as large national banks; mostly via websites and a few others cold calling. Surprisingly most banks’ fees, rates, points were minimally negotiable; even with a contract from one lender, others were unable or unwilling to budge (knowing they would lose my business). At the 11 o’clock hour (literally 11 PM and figuratively as I was going to sign with another lender the following day), one of the random banks I completed an application for contacted me via email if I was still interested in a loan. I emailed back saying I was and got a phone call at 11 PM from the loan officer to discuss rates. I will save >$20,000 over the life of the loan and pay 0 points.
Had I not completed all those initial basic mortgage applications (Thanks to WCI FB posts on best rates… also they take about 2 minutes to complete, so 15 applications, 30 minutes of time, savings of $20k a solid use of my time) I never would have had this rate. Very worth shopping around to multiple lenders, really nothing to lose.
Thanks for sharing your experience. Glad it worked out well for you.
I used to say that the WSJ had “everything you need and nothing you don’t,” because whether I was planning a trip to Argentina or in the market for a jumbo mortgage, low and behold there would be an article in the Journal that week about that very thing. WCI has that kind of relevance for me too. We were in the market for a mortgage, but doing a VA loan made it slightly more complicated because not all lenders will work with VA loans. (Also I leaned that in my state, if you go with a state chartered credit union then certain taxes don’t apply, so I tried to find a CU that would both be eligible for me to join and worked with VA loans…eventually had to give up on that, so if anyone wants to start a credit union with me that specializes in VA loans let me know). But I ended up with a jumbo mortgage with a good rate, with some points that pay for themselves in 13 months. Just went back and forth between a couple lenders a few times. Also just take the treasury 10 year and add 2 points, if you’re rate is around that you’re doing well.
This post unfortunately ignores the sub-2.5% rates on large and/or interest-only ARMs that are available through large banks if you deposit investments with them. For your run of the mill conforming loan, this post’s advice is fine, but for doctors who have jumbo loans and/or live in HCOL areas with expensive houses, there can be substantial savings when asking about rate reductions and credits in exchange for transferring some ETFs (can be Vanguard typically and can be ACATS transfers, no buy/sell required).
Good idea. You just have to be careful that you don’t give so much away moving assets to them that you end up losing more than gaining. For example, many banks don’t let you use a Vanguard ETF, they want you on their high ER, loaded mutual funds. Or if you have to move $100K there away from Ally Bank, maybe you are going from 1% to 0.1% and losing $900 a year in interest. Just gotta be careful, but certainly banks are willing to give a lot in order to get your business, that’s the whole point of doctor mortgage loans.
As long as keeping the funds in low fee Vanguard products is an option, I would have no problem with this. Who is offering this type of loan?
When I shopped for my VA loan, all 3 lenders I contacted gave me the exact same quote. Same rates, fees, and points. I got the sense that with a VA loan that everything was dictated from higher up somewhere and there wasn’t any room for negotiation. I don’t know if that is true.
Always ask if there are rate lock cancellation or extension fees when you are shopping around. Those will not show up in your quote/GFE. We found this out the hard way several years ago after backing out of a home purchase. The lender charged $2,199 to cancel the rate lock. Our attorney said it was one of the largest cancellation fees he’d seen.
We refinanced our current residence in June and we got the best rate with no points and minimal fees from Filo mortgage. Because of our previous experience I asked if there was a rate lock cancellation fee. Turns out their rate lock only lasts about 21 days so you have to get everything done really fast. If closing doesn’t happen in time (which could be your fault, their fault, or both) there will be a hefty fee to lock the rate in longer. However, at that point you can just walk away from the refi instead of paying the fee. (It would be a lot harder to walk away if it was a home purchase though). Thankfully, because I asked about the fee up front we were able to make an informed decision and decided to take the risk because we could walk away without being out any money (they waived the appraisal). Our loan closed in time so we did not have to deal with a rate lock cancellation/ extension fee, but I’ve seen reviews from others who did.
I just wish they could match those rates on our rental properties. I haven’t been able to find a good deal on refinancing those.
Good tips.
From my experience, for a refi, they will not impose the longer rate lock fee if it is their fault and you insist they cover it. I was really on top to my mortgage company because they were dragging their feet and I was concerned they would go past the time for the rate lock. When they went past the time allotted and tried to give me a fee I protested and they relented.
We just refinanced the primary and the rental, and WCI is right, the point is not the number is more about the work and research you do with all the lenders, I shopped around 3-4 lenders and then back to our own lender and the lender matched the best (they do not want to lose you).
yes, It cost 2-3 hours of calls and emails… but I saved hundreds, and if I compare the hour paid that I saved is about $2000/hour for just shop around and more than two hundred thousand in interests! A pretty good deal for my 3 hours of work!! Happy shopping!
This reminds me of the rate-chasing (and obsessing) with high yield savings accounts. A simple Google search will provide the answers!
Great points about the various factors. We closed on a home this summer and noticed this firsthand (and were fortunate to have a great loan officer!). Around the same time, however, a relative was refinancing and didn’t seem to understand points… They were focused solely on the rate.
This article is missing a few considerations. with regard to, “Now, do you understand why it really doesn’t make any sense to ask other people what rate they got for their mortgage,” I think it makes a heck of a lot more sense if you are discussing APR instead of mortgage rate for properties in the same location. A discussion about APR in this article would have been prudent.
Another factor is internet searches for price comparisons. Before you go back and forth between lenders telling them about your offers, why not start off with lenders you already know are incentivized to give you the best offers because they show a low APR on line? Sometimes mortgage companies are incentivized to offer really low rates because they need to stockpile loans for one reason or another. Those are the guys you want and a simple Zillow price comparison will help you find them easily. Once you find lenders most desperate for loans (as evidenced by low APR) go back and forth between those guys telling you about the better offers you’re looking at. Here is a link:
https://www.zillow.com/mortgage-rates/quotes/
I just refinanced mine and got a great deal through a mortgage broker. They got the best rate from the lender plus an extra discount for a bulk discount on a package of mortgages they presented at the same time, and the rate floated down three times while waiting for the closing date. My existing mortgage lender couldn’t touch the rate. I went through a mortgage rate comparison site to find the broker, contacted the two lowest brokers and took the better rate.
I refinanced a few months ago and it was surprising how different rates were from bank to bank.
It definitely makes sense to shop around, we were able to save about 0.5%, just by shopping around and negotiating. Banks will give you a lower rate if you have assets you can move to the new bank. Something to keep in mind when you are negotiating.
Additionally, great point about comparing the no-cost rate between banks. Really the only way to have a fair comparison.