Conventional Loan Interest Rates and Fees

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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

4y

Hello I've been talking to three banks and I have been inquiring about potential interest rates I could get if I were to get prequalified with them for a conventional loan on my first investment property. I don't have an exact property identified but am wanting to find a competitive interest rate so I can know what I should be using to analyze my deals (So far I have been using 4.25% to be conservative). I'm wanting to put down 20% and the interest rates have been between 3.25% and 4.25% considering my credit score is consistently between 740-760.

I asked why there is a difference between banks and the rates I'm being told. One bank (the one saying 4.25%) said it is also confusing since all conventional loans are funded by fannie mae / freddie mac etc. and the interest rates shouldn't vary much at all. A different bank (the one saying 3.25%-3.75%) said that every bank can charge whatever interest rate they want even on conventional, federally funded loans and that the interest rate is getting bumped up on me because that allows them to reduce the fees. The third didn't say much about the differences and said I should be able to get ~3.625%. All three of the banks are local to my area, two are fairly small and one is larger but still local, not like a Wells Fargo or anything.

I haven't heard anything about this before now and am asking for insight into how the fees and interest rates are correlated and if I'm better off going for a higher interest rate and lower fees or vice versa. I am also confused on if I should be getting pre-qualified with multiple banks because I know they can't give me accurate numbers without a loan application and running my credit report. I have not heard clear advice on podcasts saying if it is good or bad to get pre-qualified by multiple banks.

My questions are:

1) Does a higher interest rate mean my closing costs will be lower and a lower interest rate mean my closing costs will be higher?

2) Should an investor get multiple pre-qualifications or just one to avoid wasting anyone's time?

What is everyone's advice and take on these concepts?

Thanks and I appreciate you all!

Best,

Matt

This may very well be your first or 2nd time getting a mortgage, but you've been to the dentist. Not particularly fun, you go there for the outcome, not the process, though sometimes the process can be more or less painful, sometimes substantially so. And the quality of work can vary. Yes?

If I need some dental work done and I'm new to town, I could call around and get 10 quotes. One says $250, one says $1200, two don't get back to me, and 6 are all in the range of $600 to $700. OK, so I'm ruling out four of those dentists, the one way below market is probably sketchy, and whatever it is that attempts to justify $1200, I probably don't need it (if I did need that expensive special sauce, I'd already know, and btw this will be the dentist that says "all dentists charge the same," wouldn't it?), and the 2 that didn't get back to me don't want my business, that's totally fine, no need to tell me twice. Of the 6 left, I'm going to check reviews, take some time to figure out who I'm most comfortable with based on the interactions so far, maybe even think about the professionalism of the person that answered the phone.

But I'm probably not going to worry about $625 v $675 v $635.

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David Kelly

Lender · Nationwide Lender · Member since 2019 · 391 posts · 140 votes

4y

@Matthew Kirkwold

A lender can offer any interest rate they want. There is a certain cost (or credit) however that comes with each rate. The lower the rate higher the cost, the higher the rate less cost out in some cases a credit that can be applied towards closing costs. It’s up to the lender if they want to pass on those costs to the borrower or not. Each lender has its limitations on how deep they can go before they have to start charging the customer.. That’s why When shopping for rates make sure that you get all of your rate options spelled out with each cost associated. Some lenders like to advertise rates with a cost and some not.

Be sure to look at closing costs overall as well because if someone else is charging less that means you could put that difference towards buying the rate down further with them.

1 Reply

Trevor Alexander

Lender · Corvallis, OR · Member since 2021 · 93 posts · 54 votes

4y

Hi Matthew - the first bank was right in that the money comes from the same pool: the ones purchasing majority of loans - Fannie Mae & Freddie Mac. However, all Lenders can offer different rates because they all make their own margins.

For example: let's say there is a 400 bps margin on a conventional loan. Lender #1 pays the MLO 100 bps, company takes 150 bps for profit and expenses, and there's 150 bps that can be passed onto the customer.

Same example as above, but Lender #2 pays the MLO 100 bps, and the company takes the remaining 300 bps. No margin left for the customer, which will result in higher prices/interest rates than Lender #1.

Typically this is how Wholesale lenders can offer lower rates than bigger banks -- unless banks cut real deep in their margin to get competitive. Also, your going to be able to get pretty much whatever rate you want. You can get a lower rate and pay points, or take a higher rate and take a "lender credit". But if comparing a lender that takes a higher margin vs one taking a lower margin, one may be offering 3.0% for 2 points and the other may be offering 3.0% for .5 point

To answer your other questions:
1) Typically yes, because with a higher rate you can get a lender credit, which will reduce closing costs. A lower rate will usually cost points and increase closing costs.

2) This parts really up to you. I would recommend finding a lender you really like and trust -- maybe they aren't the cheapest around, but they will save you in money and other commodities in the future. The "cheapest lender" around may eventually cost you in the future.

1 Reply

Matthew Kirkwold

OP

Rental Property Investor · Sioux Falls, SD · Member since 2021 · 26 posts · 21 votes

4y

@David Kelly

Hi David, thanks for replying, I found your discussion very useful. I was under the impression from one of the banks that since all conventional loans are federally funded, they would have very similar (if not identical) interest rates. Upon further research and reading your response, I realize that’s not exactly correct and this makes much more sense to me.

I’m constantly trying to learn the ropes of difference concepts around real estate investing and look forward to being well versed in lending and how it all works so I can be a better investor! Thanks again for your insight!

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Matthew Kirkwold

OP

Rental Property Investor · Sioux Falls, SD · Member since 2021 · 26 posts · 21 votes

4y

@Trevor Alexander

Hi Trevor, thanks for the post, I’ve learned a lot from what you said and doing further research into it. For instance, I wasn’t aware of bps in the world of finance and I’m glad I now have a light understanding of what that is and how it affects the ability that banks have to be more or less competitive.

I was under the impression that all banks would go off of the same requirements but because they are able to modify the margins how they want, they can make their terms more competitive if they desire. Like I said, I’m constantly trying to learn the ins and outs of different aspects of real estate investing, such as how different lenders work. Thank you for highlighting these concepts for me so I can have a starting point for understanding details about deciding on a bank. I appreciate the input!

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Conventional Loan Interest Rates and Fees

Conventional Loan Interest Rates and Fees

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