What is the rate today?

Lenders do not give us a single rate. Generally, a lender will give us a variety of rates often times as many as ten or more different rates…..some that seem very low and others that seem very high. Why is this? Essentially, and in theory, everyday a lender has a dollar to invest in a mortgage. What they look for at any point in time is a certain percentage return on their dollar invested in a mortgage……let’s call their desired return on their invested capital X%. This return will change on a daily basis depending on what is happening in the current interest rate environment.

Let’s take a look at a typical Wholesale Lender Rate Sheet.

CONFORMING 30 YEAR FIXED RATE
AS OF MAY 3, 2005
WFHM

Let me attempt to explain what’s going on with this rate sheet.

• In the first column on the left, “RATE” simply indicates the range of rates that the lender is offering as of May 3, 2005. As you can see, the rates range from a low of 4.875% to a high of 6.375%.......a total of 14 different rates.
  
  
• The remaining three columns, 15 DAY, 30 DAY & 45 DAY, represent the rate lock period. This is the period of time that the lender will guarantee the rate. The period begins once a broker notifies the lender of their desire to lock a rate. In order to be protected from rate fluctuations, the loan must fund within the designated lock period.
  
  
• The numbers in the columns below the lock periods represent pricing and the best way to explain this concept is by example. For our purposes, we will assume a loan amount of $100,000. Now then, if a broker wanted to lock a rate of 4.875% for 15 days, the broker would have to pay the lender $3,020 (3.020% x $100,000). If the broker wanted the same rate of 4.875% but instead of a 15 day lock, they wanted a 45 day lock, the broker would have to pay the lender $3,363 (3.363% x $100,000). If a broker wanted to lock a rate of 5.625% for 15 days, the broker would not have to pay the lender at all. In fact, the bracketed numbers represent the amount that the lender will pay the broker; in this case the lender would pay the broker $365 (<0.365%> x $100,000). By locking for 45 days rather 15 days, the amount the lender would pay the broker would decrease to only $22 (<0.022%> x $100,000). By now you can probably figure out that a 15 day lock for an interest rate of 6.375% would generate a payment of $2,194 from lender to broker and a 45 day lock would reduce the lender payment to $1,851.

The lender obviously will like a higher interest rate more than a lower interest rate; hence, they will reward us for delivering a high interest rate loan to our clients. The reward is a higher rebate that the lender pays to us. The lower the interest rate, the less the lender likes this rate and as such the less rebate the lender will pay us. As you continue to reduce the interest rate, you finally get to a point where the lender no longer will pay us a rebate, but rather, they begin to charge us….in other words, we have to pay them for the lower rate.

Each lender has a financial model that is designed to take into consideration a variety of factors and variables. Some of those factors and variables are term of loan, expected life of the loan (there are now some more sophisticated models that take into consideration regional data on expected life of loan…Midwestern and Eastern borrowers tend to hold mortgages longer than “we Californians” do), some expectation on the future of the economy and of course the rate and fees paid or charged. The purpose of the financial model is to attempt to achieve the lenders desired rate of return….their X%. When a lender inputs to their model the interest rate (note rate) plus or minus the money they pay us for higher interest rates or the money we pay them for lower interest rates, each of the interest rates produce the desired yield of X% to the lender. Hence, lenders are totally indifferent as to the interest rate that is selected.

So when someone asks us “What’s the rate today?” they need to be prepared for an explanation of the above, including current lender wholesale rate sheets. Hopefully, this explanation leads to both education and understanding which help create better decision making for you.

If you are interested in learning more about this or any other aspect of our business, please feel free to give us a call or continue exploring this website. Either way, you are guaranteed to view the mortgage industry from a slightly different perspective - the perspective of a tiny, little 26 year old San Ramon company that has originated nearly six billion dollars in loans.

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