30 Year Mortgage Rate - Who Is Telling The Truth?

In my real mortgage rates podcast, I give you the 30 year mortgage rate every day. But how do you know that my 30 year mortgage rate is the par rate since we always say you cannot trust rate quotes?

Well, I get my rate information from an independent wholesale lender. If I were to lock a loan today for my own client, I would use a lender like this. Neither my company nor I are affiliated with them other than a broker/lender relationship. I only use their money source to fund my loans because I am a broker.

So what is the flip side to this? Big companies like Countrywide or any big bank. They have a retail division (which is where you get your loan) and a wholesale division (which is where the retail division gets the money to fund your loan).

In both cases, rate sheets are produced by the wholesale source. My rates come from an independent source and the bank’s come from its own wholesale division.

However, the 30 year mortgage rate is very different depending on whose rate sheet you look at. Before we look at examples of both rate sheets, let’s get more familiar with some terminology.

The first term is a discount point. I’m sure most of you know what this is…you pay points up front to lower your rate. Here is something people don’t know…a true discount point goes to the independent wholesale lender…the one providing the broker money to fund your loan.

For example, if you use a broker (Joe Broker) and he uses a wholesale lender (ABC Lending) then a true discount point would go to ABC Lending not to Joe Broker or his company. If you see a discount point going to a broker, it’s not real. The broker started out with a higher than par rate and the discount point you paid went into his pocket.

If you use a big bank like Countrywide or others, the discount point would go to the wholesale division of Countrywide. But, big banks start out with a higher then par rate so again the extra you paid for a 30 year mortgage rate just goes into their pocket.

I just mentioned a “par” rate…what is that? A 30 year mortgage rate at par means it doesn’t require any money and doesn’t create any money. Not every day is there a par rate but you can get really close.

The only way you can get a true par rate (or as close to par as possible) is by using a broker because he has access to independent wholesale lenders…not the ones tied to banks that produce their own rate sheets and have big retail operations.

Par on an independent wholesale lender rate sheet is usually about a half a point lower than par on a bank rate sheet!

The third term is yield spread premium. This is money created when you close at a higher than par rate. You are the one that pays the discount but when it comes to the creation of money it goes to the broker and bank…not very fair really!

These are basic examples so you can see the difference between rate sheets for a broker and a bank and how they flow from costing money to creating money.

30 year mortgage rate for a broker using an independent wholesale lender.

6.25% - (1.000%) of loan amount - yield spread paid to broker
6.125% - (.500%) of loan amount - yield spread paid to broker
6.00% - par - no money created or needed
5.875% - .500% of loan amount - discount paid to wholesale lender
5.75% - 1.000% of loan amount - discount paid to wholesale lender

As the rate goes higher than par, money is created. The parenthesis mean money is created but some rate sheets use a minus (-) instead of parenthesis to show that. As the rate goes lower than par, money is needed.

30 year mortgage rate for a bank…for the same day.

6.75% - (.25%) of loan amount - yield spread paid to retail branch
6.625% - (.125%) of loan amount - yield spread paid to retail branch
6.5% - par
6.375% - .125% of loan amount - discount paid to wholesale division
6.25% - .25% of loan amount - discount paid to wholesale division

You can see that the yield spread is much smaller on the bank’s rate sheet because they already jacked up the rate so far over par they are making more than enough.

The bank starts out at 6.5% being par! After they close the loan, they make the extra profit because the real par rate that day was actually 6.00% which you can see on the independent wholesale lender’s example rate sheet above.

So, you won’t be able to get a true par rate (or even close to one) from a bank for a 30 year mortgage rate. But it is pretty tough to get one from a broker too. They figure if the bank can do it…so can they. They don’t price less than the bank…they price the same.

It also doesn’t stop them from quoting you a par rate but closing you at a much higher one. But, you can find a broker who will close you at a par rate using The Mortgage Advantage. Check it out! It will save you so much money.

Author: Terri Ewing
Published July 10, 2008