Mortgage Rates Are Not One-Size-Fits-All

One of the biggest misconceptions about mortgage rates is that there is a single interest rate available to everyone.

There isn't.

The mortgage rate you qualify for depends on a combination of the financial markets, your credit profile, the property, the loan program, your down payment or equity, and—very importantly—the lender fees associated with the rate.

That's why comparing mortgage offers based only on the interest rate can be misleading.

The smarter approach is to compare the complete loan price: the interest rate PLUS the lender fees required to get that rate.

Here are the major factors that can affect your mortgage rate and overall loan cost.

1. The Economy and Mortgage-Backed Securities

Mortgage rates are heavily influenced by the financial markets, particularly mortgage-backed securities (MBS).

Inflation is one of the biggest factors. When investors expect higher inflation, they generally demand higher yields on mortgage-backed securities, which can push mortgage rates higher.

Other economic reports and events can also move rates, including:

• Employment and unemployment reports
• Consumer inflation data
• Economic growth
• Federal Reserve policy
• Bond market activity
• Investor expectations about future inflation and economic conditions

This is also why mortgage rates can change from one day to the next—and sometimes more than once during the same day.

2. Your Loan Amount and Loan-to-Value Ratio

Your loan-to-value ratio, commonly called LTV, compares the amount you're borrowing to the property's applicable value.

For a purchase, this is generally based on the lower of the purchase price or appraised value.

For example, if you're purchasing a $500,000 home and borrowing $400,000, your LTV is 80%.

In general, a lower LTV can result in more favorable conventional loan pricing because the lender has less risk.

Loan amount can matter too. Mortgage pricing isn't always identical at every loan size, so two borrowers with similar credit profiles and down payments may receive different pricing simply because their loan amounts are different.

3. Your Credit Score

Your credit profile can have a significant impact on mortgage pricing.

Mortgage lenders typically obtain credit information from Equifax, Experian and TransUnion. When multiple borrowers are applying together, the score used for loan qualification and pricing will depend on the applicable loan program and current underwriting guidelines.

Generally, the stronger your credit profile, the better your potential mortgage pricing.

But your credit score isn't the only factor. Your overall credit history—including late payments, collections, bankruptcies, foreclosures and other significant credit events—can also affect your loan options.

4. The Type of Mortgage

Different loan programs can have substantially different interest rates, fees and mortgage insurance costs.

Common loan programs include:

• Conventional loans — Often an excellent choice for borrowers with stronger credit and sufficient down payment or equity.
• FHA loans — Can provide more flexible qualification requirements, but typically include upfront and monthly mortgage insurance.
• VA loans — Available to eligible veterans, active-duty service members and certain surviving spouses. VA loans can offer extremely competitive rates and no monthly mortgage insurance, although a VA funding fee may apply.
• USDA loans — Designed for eligible properties and qualified borrowers in designated areas. USDA financing can provide 100% financing but includes applicable guarantee fees.

A government-backed loan may offer a lower interest rate than a conventional loan, but that doesn't automatically mean it's the least expensive loan.

You need to compare the entire cost of the financing—not just the rate.

5. Your Loan Term

Shorter-term mortgages often have lower interest rates than longer-term loans.

For example, a 15-year fixed mortgage may have a lower rate than a comparable 30-year fixed mortgage.

The tradeoff is the monthly payment.

Because you're paying the loan off much faster, the monthly principal and interest payment on a 15-year mortgage can be considerably higher.

The right term depends on your cash flow, financial goals and how long you expect to keep the loan.

6. Fixed Rate vs. Adjustable Rate

A fixed-rate mortgage keeps the same interest rate for the fixed term of the loan.

An adjustable-rate mortgage—or ARM—typically starts with an initial fixed-rate period and then adjusts according to the terms of the loan.

For example, a 5-year ARM generally has an initial rate that remains fixed for five years. After the initial period expires, the rate can adjust based on the loan's index, margin and adjustment limits.

An ARM can make sense in certain situations, but the initial rate alone doesn't tell the whole story. You need to understand how and when the rate can change.

7. Property Type and Occupancy

What you're financing can also affect your mortgage rate.

A primary residence will generally receive more favorable conventional loan pricing than a second home or investment property.

Pricing can also vary depending on whether the property is:

• A single-family residence
• Condominium
• Manufactured home
• Multi-unit property
• Second or vacation home
• Investment property
• Rural property or property with substantial acreage

This is one reason an online rate advertisement may have very little to do with the rate actually available for your particular transaction.

8. Points and Lender Fees Can Change the Rate

This is one of the most important mortgage rate concepts to understand.

You can often choose from several combinations of interest rate and lender cost on the same loan.

Want a lower interest rate?

You may have to pay additional points or lender fees.

Want to reduce your upfront lender costs?

You may be able to choose a slightly higher interest rate.

A discount point equals 1% of the loan amount. On a $500,000 mortgage, one point equals $5,000.

That means a lender advertising an unusually low interest rate may simply be quoting a rate that requires substantial upfront fees.

A Lower Rate Doesn't Automatically Mean a Better Deal

Suppose Lender A offers a lower rate but requires $8,000 in additional lender fees.

Lender B offers a slightly higher rate with little or no additional lender cost.

Which loan is better?

You can't answer that question from the interest rate alone.

You need to determine how much the lower rate saves each month and compare those savings to the additional upfront cost.

That's your break-even period.

If paying $8,000 saves you $150 per month:

$8,000 ÷ $150 = approximately 53 months

It would take about 4.4 years to recover the additional upfront cost.

If you sell the home or refinance before then, you may never recover the money you paid to obtain the lower rate.

Don't Fall for the Online "Lowest Rate" Game

Extremely low advertised mortgage rates deserve a closer look.

An advertisement may be based on assumptions that don't apply to you, such as a particular credit score, large down payment, specific loan amount, primary-residence occupancy or the payment of discount points.

The headline rate gets your attention.

The details tell you what that rate actually costs.

Before getting excited about an advertised mortgage rate, ask:

How many points and lender fees are required to get that rate?

That's where a meaningful comparison begins.

Compare Mortgage Quotes at the Same Time

Here's another mistake I see frequently.

A home buyer gets:

Lender A's quote on Monday.

Lender B's quote on Tuesday.

Lender C's quote on Wednesday.

Then they try to determine which lender has the best deal.

The problem is that mortgage markets may have changed during those three days.

You're no longer making an apples-to-apples comparison.

For the most meaningful comparison, obtain competing quotes as close to the same time and under the same assumptions as reasonably possible.

Compare the same:

• Loan amount
• Loan program
• Lock period
• Property type
• Occupancy
• Credit profile
• Down payment
• Interest rate
• Discount points and lender fees

The Rate Quote That Really Matters Is the Rate You Can Lock

A mortgage quote is useful, but until the rate can actually be locked for your transaction, it is still subject to market movement and the lender's specific lock requirements.

This is especially important when purchasing a home.

You might receive an attractive quote before you've found a property, but mortgage rates could be completely different by the time you're in contract and ready to lock.

That's why I tell borrowers:

The rate quote that matters most is the rate and loan price available when you're actually ready to lock.

Shop the Loan Price—not Just the Rate

This is probably the single most important takeaway.

Don't ask only:

"What's your rate?"

Ask:

"What's the rate, and what are the lender fees for that rate?"

Then compare that combination against competing offers.

A lender quoting 5.875% isn't necessarily cheaper than a lender quoting 6.00%.

If the 5.875% rate requires thousands of dollars in additional points while the 6.00% rate does not, the slightly higher rate could potentially be the better financial decision.

Why Mortgage Brokers Can Be Very Competitive

Mortgage lenders don't all have the same pricing structure.

Large retail lenders and banks may have substantial overhead associated with branches, corporate infrastructure, advertising, staffing and other operating expenses.

Independent mortgage brokers generally operate differently. A broker can often access wholesale mortgage pricing from multiple lenders and compare available programs and pricing for a particular borrower and transaction.

That doesn't mean a broker will automatically beat every lender on every loan.

But it does mean that comparing wholesale mortgage options against large retail lenders can be well worth your time.

The Bottom Line

Getting a good mortgage isn't about finding the lowest rate printed in an advertisement.

It's about finding the best combination of rate, lender fees, loan program and terms for your particular situation.

Remember these three rules:

1. Mortgage rates are not one-size-fits-all.

Your credit, down payment, loan amount, property, occupancy and loan program can all affect your pricing.

2. A lower rate can come with a higher price.

Always find out how many points and lender fees are required to obtain the quoted rate.

3. Shop the loan price—not just the interest rate.

Compare competing offers using the same loan scenario and at approximately the same time.

Get a Second Opinion Before You Lock

Already have a Loan Estimate or mortgage quote?

I'll help you compare the rate AND lender fees so you can see what the loan is really costing you.

No sales pressure. Just straightforward numbers and an easy-to-understand comparison.

A second opinion could potentially save you thousands of dollars.