Bank mortgage rates are a confusing topic for mortgage shoppers. Many consumers simply compare bank mortgage rates believing a mortgage rate is like any other product in that the biggest player will have a pricing advantage.

Not true…

Bank Mortgage Rates Are Not Consumer Products

Consumers are taught stores like Walmart can price products lower because the company’s volume demands price concessions from manufacturers. This is true. Walmart can go to China and get products made cheaper and bring them to the American consumer at very low prices.

The problem arises when shoppers believe the same is true about mortgages and specifically about bank mortgage rates. On the surface, it makes sense that Bank of America as a volume leader in mortgage sales should have the same clout in the mortgage market as Walmart has in the consumer products market.

So, who could blame the mortgage shopper for believing Flagstar Bank mortgage rates or Wachovia Bank mortgage rates would automatically have the lowest mortgage rates?

I can.

The consumer is wrong and I’ll tell you why.

All mortgage rates, including bank mortgage rates, are NOT products! No manufacturing takes place, so there is no place on the planet to go to get cheaper labor to reduce the cost. There really is no “labor” component to “producing” a mortgage. Sure there are marketing costs, and other overhead expenses at the retail level for mortgage companies. But consumer products retailers have these expense too…in addition to the labor costs built into the products they sell.

Bank Mortgage Rates Are Market Driven

Mortgage rates are created not by labor, but by markets. How all mortgage rates are created and re-created on a daily basis is a function of supply and demand. If you remember your Economic 101 course, supply and demand tells us and increasing demand for something (eg. a HDTV), the price will increase until the supply of that something also increases to meet the demand.

But a mortgage is NOT an HDTV as we discussed before. In the mortgage world, dampening demand actually RAISES rates…it’s actually the demand of investors - not consumers - that effect mortgage rates. If investors have a waining demaind for mortgage investments, an increased rate will increase their appetite. Think of it this way…does China want to buy more our mortgage debt if it pays a 4% return or if it pays a 5% return?

So it is the rate of return for the holders (ie. foreign central banks, pension funds, insurance companies, and mutual funds) of long term US debt instuments like Treasury Bonds and mortgage backed securities that determines mortgage rates for all retailers - both banks and brokers.

Without going into to much detail, there are other forces at work to create the mortgage rate. The Federal Reserve monetary policy stance will effect all rates including mortgage rates. This can be a huge factor in times of economic volatility in both boom and bust cycles.

Inflation fears play a big part in setting mortgage rates and is the stated reason why the Fed gets involved. But aside from that, the general feeling in the market about inflation will have a huge impact on mortgage rates since they typically are longer term financial commitments.

Competing investments are a factor too. Mortgages and the rates they carry eventually end up in the coffers of institutional investors. These investors have choices and if owning another type of investment provides a better return then their demand for mortgages falls.

All of these factors work together to set mortgage rates…not the retail power of the “big bank”.

For example, if the price of oil starts to rise due to inflation, the institutional investors will be the first to dump mortgage holdings in favor of oil stocks. Should inflation continue, the Fed will step in with a monetary policy correction raising rates, further hiking mortgage rates. This “double hit” dampens the consumers demand for mortgages sending rates even higher.

This is the market at work. It is much bigger and more complicated explanation of how mortgage rates are set than the currently believed “big banks can give better rates cuz they are big” explanation.

So, Who Offers Better Mortgage Rates?

As a matter of fact, many times it’s not the banks that offer the lowest rates…it’s the nimble company with better technology and multiple relationships that can shop the breadth of the market in seconds to find their clients the best rate.

Bank mortgage rates are simply that…the bank’s rate. Take it or leave it. It could be the best rate or it could not be. If you don’t have a plan to rate shop to reveal the truth and simply believe the erroneous logic of the average mortgage consumer…”bigger is better”…than you’ll fall victim to higher rates more often than not.

There is one last factor to discuss and that is profit. Banks and the more nimble mortgage brokers all seek to profit from the rates they quote, not just from fees. When it comes to setting rates, bank or broker, the market gives each the same “wholesale” access to rates and the difference can be summed up by how greedy is each individual retailer.

This makes it exceedingly difficult for me to tell you: “Always go with a ______”….where the blank is filled in withe word broker or bank. You see if both start out with the same rate, but you find a really greedy broker, than a bank would be better for you. The opposite is true too….a greedy bank makes the broker a better choice if he is not just as greedy.

All of this makes shopping for a mortgage a trial, I know. You can prevail now that you know how bank rates are set and that they are not set the way everyone believes, nor do they have a pricing advantage over smaller companies.

You will still need a plan for locating providers and know how to negotiate away most of the “profit” if you want to obtain the best rate possible. The one thing I can tell you with certainty is:

“Always shop and compare. And don’t assume, size gurantees better pricing or service”.

If you are in need of 4 mortgage quotes fast, our mortgage quote service can help.

Good Luck!

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