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How Mortgage Rates Are Determined?
Lenders are often asked by prospective borrowers about their current rate ask when they call up a mortgage lender shopping for rates. In fact borrowers should know that there is not only one rate but a choice of rates. The borrowers should also bear in mind that rates do not vary much between lenders. They are often very similar and perhaps identical. In order to understand this reality, you have to know how mortgage rates are determined.
In fact, every day a loan officer gets a rate sheet or a number of them. Mortgage bankers get the rate sheet from their company. As for mortgage brokers they get rate sheets from a number of wholesale lenders. Loan officers can get the rate sheets through the fax machine, the computer, or through various secure web sites requiring confidential user names and passwords. These rate sheets are absolutely not designed for public view. They are made for loan officers' eyes only because they represent the cost of a loan to the loan officer, not the cost to the borrower. The rate sheet shows the interest rate and the cost to the loan officer, expressed in points. One point is equal to one percent of the loan. On the rate sheets, there are also zero-point loan called par pricing. Numbers in parenthesis indicate premium or rebate pricing, meaning that instead of having a cost, money is actually paid back to the loan officer and the branch for originating a loan at that rate.
Generally, loan officers are paid on a commission basis. The amount earned by the loan officer and the branch is subject to a split, the same way as real estate agents. Part of the money earned goes to the loan officer and part goes to the branch. Any fees that are not part of the points go to the branch and are not subject to the split.
What happen when a loan officer quotes you an interest rate? Before any quoting, the loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on the minimum amount the loan officer adds on to his cost and also set a maximum the loan officer can charge. Between that minimum and maximum, the loan officer has a great deal of flexibility. For instance, if the loan officer decides he and his branch are going to earn one point, he will add one point to the cost of the loan and quote you that rate when you call and ask for a rate quote.
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