Lenders competing more on rates is good for borrowers
Market watchers expected mortgage rates to be climbing toward 4% by now. In a break for borrowers, the anticipated run-up in rates hasn’t really begun.
Instead, mortgage rates have declined the past several weeks, according to Bankrate’s national survey of lenders. One reason? Lenders are flush with profits from a banner year in 2020, and they’ve decided offer better deals to borrowers to compete for business.
“There’s no question it’s good news for consumers,” says Guy Cecala, publisher of trade publication Inside Mortgage Finance. “It means we’re likely to have 3 percent or lower mortgage rates lingering around a little longer than we thought.”
For homeowners looking to refinance, price competition means the window of opportunity remains open. Rates are staying low enough that a refinance makes sense for a larger number of borrowers. And for buyers competing in a fast-appreciating housing market, even slight reductions in rates boosts their buying power.
“Any time there is heated competition, it is a win for consumers,” says Greg McBride, CFA, Bankrate chief financial analyst.
Lenders did very well last year. The Mortgage Bankers Association said the industry generated an average profit of $5,535 per loan in the third quarter of 2020, up sharply from the $1,924 lenders earned during the same period in 2019. However, by the fourth quarter of 2020, average profit had retreated to $3,738.
The profitability cycle follows a predictable pattern, says Gene Thompson,
CEO of InterLinc Mortgage Services in Houston. Lenders bank their profits in boom times like the one they experienced last summer, then give some back as necessary.
“When that volume starts to dwindle, we will see companies starting to use some of their war chest to chase volume,” Thompson says. “That’s when things will start to change on the profitability side for lenders.”
That scenario is playing out now. Shares of publicly traded mortgage companies soared as industry profits rose. However, the stocks of Rocket Cos. and UWM Mortgage took a hit recently as this new reality became clear.
Rocket — the parent of Quicken Loans, the nation’s largest lender — reported a margin of 3.74% in the first quarter of 2021, a decline from 4.41% in the fourth quarter of 2020. The company said it expects further erosion of profitability in 2021, as margins fall below 3 percent.
That trend spooked investors, but Rocket CEO Jay Farner says plenty of wiggle room remains. “Margins, although moving back to more historical averages, are incredibly strong,” he said during an earnings call in early May.
What you can do to get the best mortgage rate
Before committing to a lender, do your research. To secure the most favorable mortgage rate, take these steps:
Compare offers: This advice is especially relevant now that lenders are competing on price. “This is why it is so important to shop around,” McBride says. “Not everyone offers the same price, and some lenders may have motivation to be very competitive on price.” Get offers from at least three lenders. If you live in an area with limited competition among local banks, that might require you to shop online. The upside: Comparison shopping can save you thousands of dollars over the life of the loan.
Look beyond brick-andmortar lenders: The bank or credit union where you keep your cash might offer the best deal on a home loan, but make sure you do some comparison shopping. Rates and closing costs can vary widely by lender.
Spruce up your credit score: Improving your credit is the best way to lower your rate, and it’s more effective than boosting your down payment or improving your debt-to-income ratio. The best deals go to borrowers with credit scores of 740 or higher.