Mortgage Myths vs. Facts #2: Mortgage rates are the same everywhere

Fact: While mortgage rates might be close, they are not always the same from one mortgage lender to another. There are multiple factors that determine the interest rates, and many vary from company to company.

Often, borrowers will use their current bank or choose a lender based on a recommendation when buying a home, but it’s important to shop around when you are looking for a home loan because not all lenders offer the same rates.

When comparing mortgage interest rates, it helps to understand how they are determined in order to get the best rate possible. There are some personal factors you can control and other external factors that you cannot control which help lenders set their rates.

Personal Factors You Can Control

Personal factors are reviewed to determine your risk level. If your circumstances offer less risk for the lender, you should receive a more favorable interest rate.

• Credit Score – Higher credit scores reduce the loan risk for a mortgage lender. This means the reverse is also true that lower credit scores result in a higher risk loan. Borrowers with a credit score is 740 or higher will get the lowest interest rates. Rates will be a bit higher for borrowers with a credit score of 700-739, and they’ll be even higher for scores 699 or lower.
• Debt-to-Income Ratio (DTI) – The debt-to-income ratio compares your monthly income before taxes to how much you pay towards debts each month. These debts include other loans, credit cards, leases, etc. If you have a high DTI, your interest rate may be higher to help offset the lender’s risk.
• Loan-to-Value Ratio (LTV) – The loan-to-value ratio measures the amount of the mortgage loan against the price or appraised value of the home. The higher your down payment, the lower your LTV ratio. For example, if you make a $60,000 down payment on a $300,000 home, your mortgage loan will be for $240,000. This means you are borrowing 80% of the home’s value, and your loan-to-value ratio is 80%. Loan-to-value ratios higher than 80% are considered higher risk and may result in a higher interest rate.
• Down Payment – Your down payment amount is a factor since it directly affects your loan-to-value ratio. If you make a higher down payment, you will have more equity in your home, and your LTV ratio will be lower which should decrease your interest rate. If you don’t have the funds to make a larger down payment, there are many loan programs available that offer low down payment or down payment assistance options.
• Loan Term – If you can afford a 15-year loan with higher payments, your interest rate will be lower than a 30-year loan. Lenders often provide a rate discount on a 15-year loan since it costs them less to lend money for the shorter term.

External Factors You Cannot Control

External factors have a big impact on mortgage rates. They can cause mortgage rates to move up and down daily, sometimes multiple times in one day, based on current and expected economic indications.

• Federal Reserve – Contrary to popular belief, mortgage interest rates are not set by the Federal Reserve. The Fed controls short-term interest rates to control the supply of money that banks or mortgage companies borrow to lend to consumers. If a lender relies on these funds for their borrowers, they tend to follow the Fed when rates increase or decrease.
• Economy – Mortgage rates are closely tied to how the economy is doing today and its future outlook.

  • Inflation – Mortgage rates and inflation typically move together. When inflation increases, interest rates increase to keep up with the value of the dollar.
  • Employment Rate – When the job market is doing well and unemployment rates are down, mortgage rates will increase.
  • Stock Market – Mortgage rates typically decrease when the stock market weakens.

• Lender Fees & Expenses – Banks and mortgage lending companies establish their own pricing structure based on their expenses and overhead costs in order to make a profit.

  • Closing Costs – Closing costs are the fees a borrower pays which are related directly to the cost of acquiring a loan. These fees vary by lender, and some lenders may offer a lower interest rate by increasing the closing price.
  • Overhead Costs – A lender’s overhead cost is a big factor in determining interest rates. A lender with low overhead costs usually offers better rates and or closing costs. Overhead costs may include office space costs, employee wages, marketing expenses, insurance, and other similar business expenses.

While some of these factors are out of your control, you can control the personal factors mentioned above. To get the best possible interest rate watch your credit score, lower your debt-to-income, save up to make a higher down payment and reduce your loan-to-value ratio, and choose the right mortgage lender.

If you have any questions, please contact a First State Bank Mortgage loan officer today.