Paul Schouest

NMLS ID 164767


Why do Rates vary from Lender to Lender?

Why do Rates vary from Lender to Lender?

When you start shopping around for a mortgage, you might be surprised to get a variety of interest rate quotes. Since your qualifications stay the same, it might seem like every lender would offer you the same rate. However, there are multiple factors that each lender uses as lending criteria, resulting in variation between companies.

How Rates Are Determined

Mortgage lenders are in the business of evaluating risk. Since they are loaning large amounts of money to borrowers, they need to be as confident as possible that the borrowers have the ability and determination to repay the money. The less confident they are that this will happen, the more they will charge in interest to offset the risk they take on.  

Lenders take several elements into account to evaluate risk. One of the most common is your credit score. This is a number calculated by one of the three credit reporting bureaus based on things like your record of timely payments, the length of your credit history, and your credit utilization rate. Lenders use these scores to get a general picture of your willingness to repay your debt obligations. 

Another factor is your debt-to-income ratio. If you owe large amounts on things like student loans, auto loans, and credit cards, lenders worry that your income might be too strained by adding a mortgage payment. And if you can’t afford to keep up with all those obligations, it puts you at bigger risk for defaulting on a home loan.

Your interest rate is also a product of how big your down payment will be. A large down payment shows a lender that you have “skin in the game,” meaning you would lose a lot more by walking away from your mortgage at any point. The interest rate offered will reflect to some extent the size of your upfront commitment. 

Paying points also affects your mortgage rate. A point is a fee charged by the lender at closing to lower your interest rate. It is generally equal to 1% of your total loan and you can choose to pay multiple points for a lower-than-market rate.

Lender Interest Rate Formulas

Even though these are the general considerations made by all lenders when computing an interest rate, each company has their own specific formula, with some focusing more on the size of your down payment and some paying more attention to your credit score, etc. The result is that each lender could offer you a different interest rate.

Compare the APR

Even though it might seem like the loan with the lowest interest price tag is your best choice, it is important to concentrate on the annual percentage rate (APR) of each loan to compare the true cost. The APR incorporates not only the interest rate, but the closing costs, points, and other fees giving you a rate that is easier to compare across the board. In some cases, the loan with the lowest interest rate might actually cost you more over time if you are paying a lot more in hidden fees. 

While at first glance it may seem strange to get a range of interest rates when shopping around for a mortgage, we hope that this article helps you to better understand the causes of rate variations. If you have any questions, please call us today. We loved love to answer your questions and see how we can help you reach your goals.