My wife and I are buying a house, and she discovered a creative way to secure the best mortgage rate on the market. Her technique has two phases: first, she secured the best rate for us, and then she reduced that rate even further by utilizing Wells Fargo’s relationship benefits. Let me explain.
Getting the best possible rate
At a high level, to obtain the best possible rate, we need to obtain quotes from multiple lenders. This provides us with the most data to compare, thereby increasing the likelihood that we discover the best rate possible. One shortcut that my wife used was to get quotes through a broker. Brokers send our information to multiple lenders and receive multiple quotes. They then present the best quotes to us. In many ways, brokers do the hard work for us. But even if we find a broker we like, I would still recommend getting quotes elsewhere to confirm that the broker’s quotes are competitive.
A quick note here about timing. You may not have that much time to shop for quotes. We had a week to decide which lender to work with. This doesn’t mean we need to have everything finalized within a week; we just need to decide which lender we want to work with and confirm that they are willing to work with us. A week may still feel very short for such an important task, and I would recommend freeing up your schedule during that week to focus on it. It does seem like people selling mortgages have a poor work-life balance, so you will often be able to make progress on this task outside of business hours.
Comparing lender quotes
Mortgage rates are difficult to compare, and I think this is intentional. There is a top-line rate, but then there is also a discount point system. The discount point system enables you to pay a certain amount up front to secure a lower rate over the long term. My wife made a spreadsheet that allows an apples-to-apples comparison of different lenders’ offerings. Make a copy of it here, and I will explain how to use it.
One of the key decisions we need to make when comparing lender quotes is the timeframe over which we want to compare. We may want to compare quotes over the entire mortgage term, but it’s best to be more conservative than that. We might feel disappointed if we optimize for an entire 30-year mortgage, only to need to sell the house after five years. My wife and I optimized for staying in the house 5-7 years, so that is what we put in the “Years In House” box of the spreadsheet.
Now we need to fill in the “Monthly Cost” and “Lender Fee” sections of the spreadsheet. When we find the monthly cost in a lender’s quote, we are looking for the monthly cost of the mortgage (principal and interest), excluding items such as homeowners’ insurance and property taxes. Different lenders estimate homeowners’ insurance and property taxes differently, so they would muddle our comparison. Similarly, when entering lender fees into the spreadsheet, we don’t want to include taxes or third-party fees—only the cost of points and fees specific to the lender.
Now that we have filled in our time horizon, monthly cost, and lender fees, the “Estimated Cost” column will be automatically filled in. This column involves a simple calculation, adding the lender fees to the monthly cost and multiplying the result by the number of months in our time horizon. As you can see in the default lender quotes I added to the spreadsheet, this allows us to compare how much we will pay over our time horizon if we invest more in points to lower our rate, or if we don’t pay for any points and take a higher rate. The best rate is the one that will enable us to pay as little as possible over our time horizon.
A quick note about points and refinancing
There is an additional downside to the discount points that we have not discussed yet. If mortgage rates decrease, we may be able to lower our monthly costs through refinancing to the lower rate. If we refinance from a rate that we bought down using discount points, we are effectively reducing our time horizon on our initial loan. We should still consider refinancing if it will give us a lower monthly rate, but we may have received a worse deal on our initial loan than we initially planned. This is another reason to focus on nearer (5-7 year) time horizons.
Wells Fargo relationship benefits
Now that we have a quote for a fantastic rate, we can take it to other lenders, and they will often be willing to match it. I am not really sure why lenders are willing to match rates from other lenders who may have worse pricing systems. But it is best not to ask questions. We now need to find a lender that offers to match our best rate and that also has additional benefits.
The best additional benefit my wife found was Wells Fargo relationship benefits. This program allows us to reduce our mortgage rate if we transfer our brokerage assets into Wells Fargo (or if we already have brokerage assets in Wells Fargo). The reductions are pretty significant, depending on how many assets we transfer:
$250,000 in assets: 0.125% rate discount
$500,000 in assets: 0.250% rate discount
$750,000 in assets: 0.375% rate discount
$1 million in assets: 0.500% rate discount
$2.5 million in assets: 0.625% rate discount
Importantly, transferring our brokerage accounts is not a taxable event, although we may need to pay account closure fees.
There are a few crazy aspects of this technique. The first is that we can transfer our brokerage account to Wells Fargo, secure our mortgage rate, and transfer the brokerage accounts back out of Wells Fargo – there is no minimum duration we need to hold assets in Wells Fargo (although some of the processes are slow, so we should plan on the money being in Wells Fargo for at least 20 days). The second crazy thing is that we took an already amazing rate and reduced it further. What a deal!
Some caveats
Be aware that if mortgage rates decrease and we decide to refinance, we may want to transfer assets back into Wells Fargo to regain the relationship benefits. If we don’t want our assets in Wells Fargo long-term, we may end up performing multiple transfers into and out of Wells Fargo. The benefit of low rates is so good that I think it is still worth it.
My wife and I did not do this technique on purpose; it fell into our laps. If you decide to use this technique intentionally, consider the ethics of working with a broker without the intention of buying through them.
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