How do lenders decide what to charge for a loan? Well, part of that determination is you--how risky your overall "package" is. It's kind of like the way car insurance companies decide how much to charge you. If you're the careful lady with a Volvo and a squeaky-clean DMV record, your insurance rates should reflect that. If you drive a super-charged fire-breathing monster and are on a first-name basis with the local traffic court judge, you know you're gonna pay more. Fair enough.
In mortgage lending, risk comes from all sides--where the property is (have values been declining or holding steady?), the amount of your down payment or equity (more = better), where your money comes from (steady W-2 job for twenty years or a brand new business?), your credit history, and your assets (how long could you survive if your income dried up?).
The financial markets matter. Conforming loans are packaged into Mortgage-backed Securities (MBSs) and sold like stocks. The prices for these drive interest rates. Like the bond market, MBSs move according to expectations for inflation and generally in opposition to the regular stock market. So when stocks go up, often bonds and MBSs go down (which increases rates). When stocks go down, mortgage rates often improve.
And finally, it matters where you shop. Lenders may go to the same well when it comes to most mortgage financing, but there are still variables which influence a specific lender's pricing at a given time. For example:
1. How efficient the lender is ?? office space, Internet presence, marketing, in-office or centralized operations, and data processing capability can affect the lender’s profit margin.
2. Temporary market conditions ?? sometimes a lender needs more business to keep employees busy, or expand market share in a particular area, even if it doesn’t make any money on those loans. In this case it might offer below market rates for a very short period of time. On the other hand, a lender may have too much business and could raise rates to scale back on the number of loans in its pipeline.
3. Economies of scale ?? the biggest lenders may be able to take advantage of centralized systems, which can be more efficient in very busy times. Also, the largest banks or brokerages may be able to make less per loan while retaining profitability. On the other hand smaller outfits may be able to cut back and run “lean and mean” when times are tougher.
Whatever goes into the pricing of your mortgage loan, shopping and research (I know, sorry!) are still the best ways to ensure getting the best of the “going rates” quoted.
