New to Industry Loan Officer Series

[New Loan Officer Series] Discussing Interest Rate with Customers

When working with borrowers, interest rate will be an important discussion factor. But before you start discussing rate with customers, let’s make sure you know the basics.

Interest Rate vs. Annual Percentage Rate

Mortgages deal with both interest rates and annual percentage rates (APR).

An interest rate is what a borrower pays each year to borrower their mortgage funds expressed as a percent. The interest does not reflect any fees or charges that might be associated with the loan.

APR includes the interest rate, mortgage broker fees (if applicable), points, and any other charges included in the origination of the loan. The APR is typically higher than the interest rate. Essentially it represents the costs over the term expressed as rate.

How is U.S. Residential Mortgage Interest Rate Determined?

Residential mortgage interest rates are based upon the bond market – mortgage bonds/mortgage-backed securities (MBS). People will often look to the 10-year treasury rate when thinking about residential mortgage rates. The 10-year treasury rate often – not always – moves in the same direction of the MBS bond market. But it is the MBS bond market and other indexes that are truly affecting residential mortgage rates.

When the Fed (short for the Federal Reserve System) discusses or acts on the short-term discount, it affects credit card rates, car loans and lines of credit. The short-term discount rate has little impact on long-term residential mortgage rates.

Be prepared to answer questions regarding rate when the borrower receives the Loan Estimate (LE). The Note Rate will be disclosed which is the interest rate their payment will be based on, but they are bound to ask questions about the APR and Total Interest Percentage (TIP). The TIP is the total amount of interest they will pay over the life of the mortgage loan expressed as a percentage.

Rates and Customers

The most often asked question in the mortgage business is – “What’s your rate?”

When purchasing a home and negotiating sales price, it can be very helpful for the buyer to understand how interest rates effect the monthly payment. And based upon that effect, the purchase negotiation can be influenced.

Let’s look at an example. Imagine your customer is looking to purchase a home and is negotiating price and has made an offer of $200,000. The seller is looking for the buyer to raise their offer. While $1,000 may seem like a lot of money, when financed into a 30-year mortgage at a 4.00% rate, the buyer will be paying less than $5 a month ($4.77 to be specific). So, the question is not, “do you want to raise your offer by $1,000?” The question really is, “would you be willing to buy that house for $4.77 more a month?”

Rate is usually measured in eighths or an eighth of a point (0.125%), meaning a rate goes from 4.0% to 4.125% to 4.25%, and so on. What is the difference in monthly payment for the borrower for an extra 0.125%? For a $200,000 loan amount with a 30-year fixed mortgage, an eighth of a point is $14.47 per month or $3.34 per week. If $3.34 per week is a problem for the buyer, the buyer may be looking at the wrong house.

So now that you understand the math behind rate, let’s talk about how to answer the question – what’s your rate?

There is no one definitive best answer to this question, but here are a few suggestions.

Don’t mention rate, mention payment:

  • Borrower asks: What’s your rate?
  • Your response: Based upon the information you have given me, your monthly payment is $969.30. Are you comfortable with that?

Give some control:

  • Borrower asks: What’s your rate?
  • Your response: Whatever you want it to be. Based upon how much money you put down and how much you are willing to buy your rate down, you can get whatever rate you want.

Get them to give specifics:

  • Borrower asks: What’s your rate?
  • Your response: It’s not my rate. It’s your rate. And I can’t give you your rate until I know your down payment, your credit score, the contract price, the loan term, fixed or adjustable rate, etc. And anyone who gives you a rate without knowing all of that is guessing. If they will quote you a rate, get it in writing with a guaranty. When I give a rate, it is accurate, and I treat it as a promise.

Say it twice and pivot:

  • Borrower asks: What’s your rate?
  • Your response: I understand that rate is important, and you know our rate is competitive, but…

…before that you need to get the loan approved, and we have a 98% approval percentage.

…you don’t want to wait forever for an approval, and we have a four hour turn time that allows you to know exactly what you are dealing with and can help you when negotiating the contract price of the home.

…the person you are dealing with has a 5-star rating from 112 customers, all of which were happy with both my rate and my customer service.

We suggest practicing a few of these conversations with your manager or a mentor to see which you feel most comfortable with and where you can improve.

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