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How Mortgage Lenders Make Your Mortgage Rate Quote

Gina Pogol The Mortgage Reports Contributor

Mortgage Rate Quote Depends On Each Lender

You’re shopping for a home loan and want today's mortgage rates.

So, you call up a lender. Usually two. Maybe even three or four — because you remember that television ad about when lenders compete for your business.

Each mortgage rate quote you receive is different.

Why is that? Are lenders pulling their rates from thin air? Are they trying to take advantage of you because you’re a first-time home buyer? Do they assume you don’t know any better?

The answer to all of these questions is a resounding “no”.

Mortgage lenders don’t “make up rates” on the spot, nor do they try to fleece you. Mortgage lenders, on the whole, are ethical, considerate, and concerned about earning your business.

There are actually a lot of valid reasons why mortgage rate quotes differ between banks. We’ll address them here.

Lenders Control Some Parts Of Your Mortgage Rate

Mortgage rates are “made” based on the price of mortgage-backed securities (MBS), which are bonds bought and sold on Wall Street.

When bond prices rise, mortgage rates drop; and when bond prices drop, mortgage rates rise.

Mortgage lenders — as the “salespeople” of mortgage rates — are really just the last leg; the middleman between the mortgage bond market and you, the consumer.

Middlemen all charges different fees for their services so this is why mortgage rates vary from bank to bank. It’s also the main reasons to get multiple rate quotes before you lock a mortgage rate.

Mortgage rates can vary by 25 basis points (0.25%) or more between banks.

So, how do banks set their mortgage rate “markup”. There are four main factors.

What is the bank’s current capacity for new business?

A mortgage lender’s ability to make new mortgage loans is often limited by its resources. Making a new loan requires people, time, and money — and banks have been reducing headcount since 2007.

When the lender is handling a lot of new loans, its already-scarce resources become more scarce. The bank’s way to slow new business, then, is to raise its prices.

During periods of ultra-low mortgage rates and during refinance booms, capacity gets strained and mortgage rates don’t drop as much as expected. This occurred most recently in May 2013, and again through early-2015.

What is the cost to originate your particular loan?

Originating a mortgage requires resources and using those resources comes at a cost. The cost is the same for loans of all sizes. However, the profit on a new mortgage loan is based on a percentage of the borrowed amount.

This means that a $300,000 loan costs the same to originate as a $50,000 loan, but yields a much larger profit. The same can happen with loans which exceed the conforming loan limit.

“Jumbo” loans, as these loans are called, cannot be banked through the government and, therefore, can be less profitable as compared to the $300,000 loan described above.

For all banks, there’s some point where cost to originate a loan is higher than its potential profit. At this loan size, lenders begin adding surcharges which can affect your final rate.

How efficient and profitable is your mortgage lender?

Mortgage lenders, like other business entities, exist to make a profit. Some profit by doing huge numbers of loans with small margins; and, others profit by doing a small number of loans with large margins.

In general, lenders who capture small margins offer lower rates than lenders who aim for large margins. However, this isn’t true 100%.

A highly-efficient lender will earn large margins on a large number of loans. Your lender’s efficiency will help determine your quoted mortgage rate.

You Control Some Parts Of Your Mortgage Rate, Too

The majority of the factors which affect your mortgage rate are actually linked to you — not your lender.

How do you plan to use the property?

Your mortgage rate is affected by whether you intend to live in a home as a primary residence or as a vacation home; or, to own the home as a real estate investment with renters.

Mortgages linked to primary residences are considered least risky to a bank and get the lowest mortgage rates available. Vacation and second homes are next-least risky, and investment properties earn the highest mortgage rates.

Is your credit score any good?

When you borrowing to purchase or refinance a home, your credit score will affect your mortgage rate, assuming you use a conventional home loan.

Mortgage applicants whose credit score is 740 or better will usually get quoted with a rate 100 basis points (1.00%) or more below the quotes of an applicant whose credit score is 620.

Do you plan to pay discount points?

Discount points are a one-time, upfront closing cost which “buy down” your quoted mortgage rate.

Each discount point comes with a cost of one percent of your loan size and will generally reduce your mortgage rate by 25 basis points (0.25%). One discount point on a $424,100 loan size would cost $4,124.

Discount points are optional and, often, tax-deductible.

Do you plan to make a downpayment?

The size of your downpayment can also play a part in your mortgage rate.

Certain low- and no-downpayment loans, such as the FHA loan, USDA loan, and VA loan, offer no discounts for making a larger downpayment than necessary. Borrowers using conventional financing, however, can see substantial savings — especially buyers of condominiums.

When you’re planning for your loan downpayment, talk with a mortgage lender to see what pricing discounts for which you may be eligible. The lower your loan-to-value (LTV), in general, the lower your final mortgage rate.

Which loan options have you selected?

There are other loan choices which can affect your mortgage rate, too, and each is under your control and not the lender’s.

For example:

Adjustable-rate mortgages (ARM) get lower rates than fixed-rate loans15-year fixed-rate loans get lower rates than a 30-year fixed-rate loans1-unit homes get better rates than 2-4 unit homesDetached homes get better rates than attached homes (e.g.; row homes)Verify your mortgage eligibility (Oct 24th, 2019)

Some Parts Of Your Mortgage Rate No One Controls

Of course, there are also part of your mortgage rate quote that are controlled neither by you, nor your lender.

We call these things “market forces”.

Market forces are what moves MBS markets; what drives the base price of a mortgage-backed bond upon which mortgage rates are made. And, of course, market forces are global.

In general, global economic weakness raises demand for MBS, as does economic and political uncertainty. This helps to move mortgage rates lower across the board, from all banks.

There are literally hundreds of market forces which affect U.S. mortgage rates and, while it’s possible to forecast several of them, we cannot possibly forecast all of them.

Mortgage rates, as a consequence, are unpredictable.

What Are Today’s Mortgage Rates?

Mortgage rates are different from bank-to-bank. It’s why you should get multiple quotes before locking a loan. You never know how low a quote can go.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.


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