What drives your actual interest rate on a loan?

[Kevin Brunke]

I've been reading the forum for a while, listened to most of the pod casts, and have read several other real estate books, but do not currently own investment property. We have a conservative strategy we plan to pursue in the next few years to diversify our investments and secure our financial future. Nevertheless, we are currently refinancing our primary residence to lower the payment/rate and expedite paying it off to rid us of all personal debt prior to investing in other properties. I filled out the loan application last night and it said the rate was 2.75% (not locked in), we got the initial paperwork today and it gave us a rate of 2.875%. The difference is trivial for the 99k refi, but it got me to wondering what causes the difference? We both have good credit at around 820. We didn't want to bring any cash to the closing, so it's all rolled into the new loan. Are these advertised rates only for people with perfect credit? Did the financing of closing costs add additional interest? Thank you to all of the highly experienced folks who donate their time in answering questions on this forum to help people like me get a better understanding of the real estate game. Kevin

[Chris Mason]

Interest rate pricing changes daily, ballpark correlated with what the 10 year tnote is doing from day to day (not always, usually). 

You have your base interest rate prices. Example using made up numbers:

4.125%: -1.345

4%: -.643

3.875%: 0.034

3.75%: 0.433

And there are a bunch of rates higher and lower than that too, I just used four.

Then you have FNMA's LLPAs, which stay the same day-to-day.

Let's say it's a 20% down good FICO conforming scenario on a SFR. Let's suppose loan amount $400k. OK, so only applicable LLPA is the 0.5 hit. Let's say this borrower wants a little bit of a lender credit, so I'm going to look at 4%.

-0.643 + 0.5 = -0.143.

0.143% * $400k = -$572.

This cost, in discount points, is a negative number. So we wouldn't call it discount points. We would call it a lender credit. Suppose borrower does not lock because he emails me at 7 pm and I'm not at work.

But tomorrow maybe rates get dramatically better because Russia invades Syria and the Dow Jones plummets and Trump actually got elected and everyone on Wall St gets scared and sells stocks to buy safe things like 10 year tnotes and... mortgage backed securities (this is why they are correlated). 

Maybe now it looks like this:

4.125%: -1.748

4%: -.862

3.875%: -.214

3.75%: 0.244

Yay!

-.862 + .5 = 0.362

.362% * $400k = -$1448, someone just made almost a thousand bucks because I didn't check my email at 7 pm (lender credit).

Or they could look at 3.875%.

-0.214 + 0.5 = 0.286.

.286% * $400k = $1144 (discount points)

EDIT: Seriously though, go look at Fannie's LLPA link above if you want to see where your rate comes from mostly. That overnight movement is minimal compared to the hit for buying an investment property with only 20% down and shaky credit, for example. 

I often try to get people to wait a month or two and bump their FICO before buying if they are below 680 FICO just because it's bad for business for me to get a reputation for having crappy rates because you, the homebuyer, don't take care of your credit.... and I 100% have lost business because someone asks their friend "what rate did you get?" without ALSO asking them about their credit and the scenario.