Mortgage lenders have some flexibility in their mortgage pricing. This means that you have the opportunity to negotiate a better rate.
Mortgage loan agents typically get daily rate sheets from their secondary marketing department or from “wholesale’ other lenders. These mortgage rate sheets are not for public view, because they show the price of a loan before the retail mark-up, similar to how retail stores buy and sell goods.
Example of Rate Sheet Pricing for a Fixed Mortgage:
* 5.500% – (1.000) * 5.375% – (0.750) * 5.250% – (0.250) * 5.125% – 0.000 * 5.000% – 0.250 * 4.875% – 0.500
In the above example, each mortgage rate corresponds to the cost of the rate expressed in terms of “basis points”. One point is equal to one percent of the loan amount.
Internal Mortgage Rate Pricing
The above rates with numbers in parenthesis next to them indicate “rebate” points paid to the lender for selling a loan at a premium. The rates without numbers in parenthesis show the lender’s “cost” to sell a loan at that particular interest rate. The rate with corresponding zeros is the “par” price, which means the lender incurs no cost and they receive no rebate points for that interest rate.
Higher rates have lower short term costs because the mortgage holder will earn more in interest over the life of the loan, rather than points paid up-front. Conversely, lower rates have a higher up-front cost because the mortgage holder earns less interest over the term of the loan.
Retail Mortgage Pricing
For a specific mortgage rate, a loan agent has to add points to the rate sheet pricing, which is essentially the lender’s profit. The lender normally sets a policy on the minimum and maximum points the loan officer adds to the rate sheet cost. The loan officer has the flexibility to price a loan within the allowable range. Most loan officers are paid on commission, which is usually based on a “split” of the points divided between them and the lender.
If the lender’s standard policy is to charge a minimum of one point and a maximum of two points per loan, the loan officer has the ability to negotiate mortgage rates according to how competitive they need to be. Based on the rate sheet pricing above, the retail cost of a 5.125% rate may be one to two points, while 5.5% may have a cost of zero to one point.
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