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:
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 So someone else's experience last month or even yesterday is already out of date.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!