There are two adages that we have all become accustomed to – If it sounds too good to be true, it probably is and You get what you pay for. At Filo, we are adamant about defying both. Your interest rate quote may sound too good to be true and that’s a good thing. We are used to hearing that and you should be too.
As far as You get what you pay for, we don’t believe mortgages should apply to this mantra. Every mortgage company has the same request from customers; to process and close a loan for you, the customer. So why do the fees vary so much from one lender to the other? Two words: Profit Margin. We believe in a fair process with no lender fees to help you find the benefit to your financing needs.
COMMERCIALS COST MONEY, STADIUMS COST MORE
Lender rates and costs are all created with one thing in mind; profit margins. Buildings cost money. Commercials cost money. Stadium naming rights cost money. Executive suites cost money. All of these things are overhead costs that affect profit margins. So how do banks and lenders have these things and still make enough revenue to offset those heavy costs? There are only two revenue streams: charging customers higher rates than markets require (more on that later) and lender fees. Origination costs, processing fees, and underwriting fees are just fancy words for lender costs. The math is easy. The more you pay, the more the company makes. The more the company advertises and buys buildings and sponsors golf tournaments, the more they have to charge you to do so. How would you feel if you knew you were paying more just so the company could buy a sports stadium? The jig is up.
HOW ARE INTEREST RATES DERIVED?
To understand where your rate comes it helps to think as simplistically as possible. The truth is, there is a lot going on behind the scenes but the easiest way to think of mortgage rates is to think of them like stocks. Most people don’t realize that mortgage rates and securities trade on Wall Street in the same manner that your typical blue-chip companies do. When the FED meets and indicates they are cutting rates, most likely today’s rates have already factored that rate cut in. Think about this headline: ‘XYZ Company shows a quarterly profit of $5m, stock tumbles.’ How could that be? If their quarterly projection had them earning $10m, the market starts trading as if they are hitting that target. If they miss that mark, the stock drops despite showing profitability. Rates move in a similar function.
The Federal Reserve Board sets the rates with which the federal government provides capital at a cost. The lower the rate the banks borrow money from the government, the lower the rates lenders offer you. But there are other factors at play that affect the pass-through to you. External factors like market pressure, domestic and global economies, the value of the dollar, etc. can all impact the rates offered each day. That’s why the rate you see today, might be dramatically different from the rate you see tomorrow.
SO WHY DO RATES VARY SO MUCH FROM LENDER TO LENDER THEN?
This brings us back to that profit margin talk from before. Most companies do a lot of projections, analyses, and forecasts on what they NEED to make and what they CAN make. A lot of science goes into how much more inflated the rate can be versus what the lender can ultimately sell your loan for. Think of it like you are trading in your car to a dealer. The dealer is going to offer you a price that gives them the maximum profit when they sell it on the secondary market. The lower their offer, the more they make. Rates function in a similar fashion. If a lender can sell you a rate at 4.5% when they could have sold it at 4.25%, that spread is additional revenue, all at your expense. At Filo, our NEED/CAN analysis is aligned. We only charge what we need to make and let you save the rest. That’s why our rates are lower.