Last month we looked at how pilots can avoid some of the traditional mortgage pitfalls along the path to home ownership. Now let’s dispel some common myths about interest rates.
Myth #1: Interest rates are set by the Federal Government therefore they are the same everywhere.
False. Mortgage interest rates are not set or controlled by the government in any way, shape or form. Instead, the majority of mortgages are sold and packaged together into mortgage backed securities (MBS) by Fannie Mae, Feddie Mac and Ginnie Mae. They are then sold to investors. Wall Street/investors are really the ones that determine what a mortgage at a specific rate is “worth.”
Lenders then determine what rate to offer based on their profit margin. Most lenders try to make 2.5-3% on your mortgage when they sell your loan to investors. In addition, they typically charge fees to complete the transaction. Some lenders advertise “no fees” but then increase their profit margin to make up for not charging any fees.
Myth #2: You can’t negotiate to get a lower interest rate
False. Most lenders look at your mortgage as a one-time transaction versus a lifelong relationship. As a result, they are going to price your mortgage to make every penny they can reasonably expect to squeeze out of you. Many lenders assume their clients are ignorant about how interest rates work. As a result, they assume you will simply accept whatever high rate they offer you. Shopping around will give you leverage to make lenders compete for your business. Just like a car salesman, most loan originators will go to “management” to get you a lower rate if they think you’ll go elsewhere. Better to find a lender who just offers you their best pricing upfront and avoids playing games.
Myth #3: It’s best to use your bank as your lender because you’ve been banking with them for years
False. The mortgage department is completely separate from the banking side of your financial institution. Just because you’ve had a good banking experience thus far does not mean you’re going to get the same level of service during your mortgage transaction. The more advertising, branch locations, and staff the company has, the higher the expenses a lender needs to cover to make a profit on your mortgage. How do you make more money in the mortgage business? You guessed it, sell mortgages at higher interest rates or increase your fees.
Myth #4: Shopping around for lower rates will hurt your credit score
False. This is a fear tactic. All three credit bureaus agree that shopping around is a sign of a responsible consumer. To reward you, the credit bureaus count all mortgage credit pulls made within a 30-day period as a single credit inquiry. That being said, a good lender should be able to quote you a rate based on a self-reported credit score and save the credit pull until you’re ready to move forward with them as your lender of choice.
Bottom line, the secret is to shop around and arm yourself with as much education as you can before you pick a lender. A mortgage is a commodity so save your hard-earned money for the fun things in life. At the end of the day, there is no difference between a name brand big bank and a small mortgage broker when it comes to the product you receive. There is no shortage of money in this economy so go where you get the best money and service. A little extra work at the beginning can save you a lot of money in the long run.
Remember, as a professional pilot you are every lender’s dream client. Typically, professional pilots are buying above average homes, with good income, and a good credit history. Also, the longer you fly, the more money you’ll make which many times means an even nicer home purchase in the future. Make sure your loan originator is building a relationship with you and not just performing a one-time transaction. You are the prized client so the service and rate you’re offered should reflect that.
The next article will discuss how to lower your interest rate to save you money in the long run. In the meantime, please feel free to contact me with any questions at firstname.lastname@example.org or on my cell phone at 850-377-1114. I’m always happy to help a fellow pilot navigate the mortgage process. ACN