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Lenders want to sell their loans to free up more capital to lend and remove the risk that borrowers may default from their books, so they price their mortgages with the rates and terms at which these quasi-government investors will buy them.

Pricing loans now for rising rates later

The mortgage industry has become so competitive that there’s little room, or desire by lenders, to pad interest rates, says Eric Smith, another former mortgage originator and banking executive, now a financial literacy coach in Atlanta. The only exception, Smith says, might be for large mortgages that lenders often keep on their books.

These mortgages, typically $417, 000 or over in most areas of the country, known as ‘jumbo loans’ in the industry, exceed size limits set by Fannie and Freddie. Because of that, they aren’t purchased by those government-sponsored entities, so lenders usually hold onto these loans, as well as the relationship with the affluent clients who take them out.

Holding a portfolio of jumbo loans, and concerned that interest rates will rise, lenders might be “inflating that [mortgage] price a little bit to hedge against when short-term rates do start to come up.” That helps to protect their profit margin on low-interest rate loans, Smith says.

Davenport adds that, for jumbo loans held by banks, “they are in many cases borrowing money from places like the Federal Reserve at 0.25-0.50 percent and not passing along the savings to customers.”

Shmuel Shayowitz, president of Approved Funding in River Edge, New Jersey says there are two other instances when banks may hedge rates a bit. Sometimes lenders are waiting to be sure that a lower rate will stick and not rebound immediately, he says. That would leave the bank with a rate locked for a customer that’s lower than a now-prevailing rate.

Other times it may be an effort to manage mortgage demand in order to clear a backlog of loans without adding manpower to handle additional volume, Shayowitz says.

Two ways to get a rate break

While there is little — make that nothing — you can do about bank profit margins or how Fannie and Freddie shape lender pricing, Davenport says there are other cases in which a borrower may not be getting the best rate he or she can get, and sometimes a tactical move or two can make the difference.

First, mortgage rates vary according to a borrower’s FICO score, and, he says, that’s where interest rate adjustments are very real.

“Someone who has a 740 score isn’t really likely to default any more than someone who has a 760 score, but they’re going to pay a higher interest rate, ” Davenport says.

Knowing where price breaks fall on the FICO score scale can help a borrower earn a significant discount. For example, if a lender’s discount kicks in at a 700 credit score and yours is 680, you might decide to reduce a credit card balance or two enough to bump your score up to the next level.



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