Do Mortgage Rates Vary by Lender?
Of all the guidance handed out to homebuyers, none is more common than the advice to shop around for the right lender. That could be because this is one of the most important steps for homebuyers to follow — in part because mortgage rates vary by lender. But there’s more to it than that, as you’ll learn in this article.
- Why are mortgage rates different by lender?
- Do rates vary by state?
- Why is my rate different from the advertised rate?
- If I lock my rate, can I renegotiate if rates decrease?
Why are mortgage rates different depending on the lender?
We may think of financial institutions as a single type of entity, but each bank and credit union has personalized needs regarding profit margins, operating costs and more.
“Rates charged by a lender have to do with that lender’s business strategy,” said Tendayi Kapfidze, chief economist at LendingTree. “Lenders have different cost structures, target different borrowers, and may use either digital or manual processes, all of which can affect the rates they offer.”
The following factors, as well as others, determine what a bank needs to charge for mortgage interest:
Competitor rates. Mortgage lenders are competing for your business. One way they can try to lead the pack is by offering lower rates than other lenders.
Risk assessment. Every financial institution has its own set of mortgage loan underwriters and risk assessment system. This can greatly impact the type of interest rate they decide to offer each borrower, as they may view certain loans as more or less risky than another lender.
Funding cost. There is a cost associated with lending money, and each bank may have different costs, which will be partially responsible for the rates they need to set.
Operating expenses. Whether a financial institution is a nationwide, brick-and-mortar business with thousands of employees, a small regional bank, or an online-only bank, there are costs associated with it staying open.
Profit margin. Profit is what keeps banks going, and the profit margin they want to maintain can determine what types of interest rates they can afford to offer. As an example, a credit union, which is member-owned, may have far lower profit margin expectations and, therefore, may set lower rates.
Shopping for rates may be necessary, but that doesn’t mean it’s easy to determine the total savings one rate offers over another. One way you can weigh the lifetime savings of lower rates is by using the LendingTree Mortgage Savings Tracker.
Do rates vary by state?
It’s not just different lenders who have different rates. You may also get varying rates based on the state in which your home or the financial institution are located. Capitalizing on these differences and shopping around can offer a huge financial advantage, as indicated in a recent LendingTree study about mortgage lending competition, authored by Kapfidze. In the study, he found borrowers who compared mortgages in the beginning of 2018 saved an average of $28,000 on a $300,000 fixed rate loan.
This variance by state can be due to multiple factors, including:
Foreclosure rates and laws. Foreclosure is a fact of life for lenders, but areas with high foreclosure rates, as well as those with more rigorous foreclosure proceedings, may end up with higher interest rates. “States have different laws, which can impose additional expenses on lenders, so lenders find ways to account for those expenses in the rates they charge,” said Kapfidze.
Population. In an area with a smaller population, competition among lenders can be stiff, meaning they may have more incentive to lower rates to attract business. Likewise, a highly populated area with a large number of lenders will also see more rate competition. Case in point: In a recent LendingTree mortgage competition study, both Providence, a smaller city, and Boston, one of the most highly populated, claimed the no. 1 and no. 2 spots.
Operating costs. Just as some states have a lower cost of living, so too do some states have a lower cost for doing business. A state’s tax rates, median wages, and more all factor into what a lender can afford to charge in interest.
Why is my rate different from the advertised rate?
When lenders advertise mortgage rates, they often hold up their lowest possible rate as an inducement to in get new customers. But to qualify for these rates, borrowers must meet some stringent criteria.
“Typically, the advertised rate states the parameters used to come up with it, including the expected down payment, credit score, type of property, and loan term,” said Kapfidze. “The advertised rate is very stylized and each borrower is unique, so it’s hard to say what percentage of borrowers will qualify for that rate.”
The terms a borrower must meet to be eligible for advertised rates can include:
- Meeting a specified credit rating
- Having a specific loan term
- Maintaining a certain loan-to-value ratio
- Asking for a loan amount within a certain range
When a buyer deviates from a lender’s ideal in any of these categories, it can result in a completely different rate than the one that was advertised. This is, in part, why it’s so important to shop around for rates based on your individual needs, situation, and qualifications.
Discount points can also give you a different rate from those advertised. Discount points are fees paid to the lender to lower your interest rate. Each point will generally cost about 1% of your mortgage (so one point on a $150,000 mortgage would cost $1,500), and each point can reduce your overall interest rate as much as 0.25%.
One additional aspect of the advertised rate versus the offered rate that can be confusing is the transition into an annual percentage rate (APR). The quoted interest rate is the percentage charged against the loan amount and is considered to be the cost of borrowing the money. APR, however, is the annual expression of the total cost of the loan, including the interest and fees.
Perhaps the easiest way to understand the distinction is to look at how APR is calculated:
Fees (origination and interest) / principal (including closing costs) / number of days in the loan x 365 x 100.
Let’s say you are getting a loan to buy a home for $200,000 at a 4.5% interest rate. The loan is for 30 years and includes closing costs of $4,800.00. You have an origination fee of 1%, you’ve paid for 1 discount point (which brought you down to the 4.5% interest rate) and $800 in title and other fees. While the interest rate on this loan is clearly 4.5%, the APR would be 4.703%.
If I lock my rate, can I renegotiate if rates decrease?
Mortgage loan rates are always in a state of flux, which puts pressure on buyers as they shop around. One way to reduce this pressure is to get a rate lock with a potential lender. A rate lock means a lender has guaranteed a rate to a borrower for a specified period of time, in exchange for a fee.
“You want a rate lock so you don’t expose yourself to volatility,” said Kapfidze. “Rate locks are more about risk tolerance and volatility exposure than about having an opinion about where rates are going to go.”
Most rate locks require closing to occur within 30 to 60 days, but buyers may be able to pay or an extension if they need longer.
Rate locks offer distinct benefits, but they aren’t all upside. If rates drop during the term of the rate lock, the buyer is stuck unless they purchased a float-down provision, which gives the buyer the right to readjust if mortgage rates decrease. Another downside is that, should you decide to cancel, you may be charged a cancellation fee.
And while a rate lock might lock in a specific rate, it doesn’t guarantee that you’ll still qualify for it by the time you’re ready to close. If something changes with your credit score, income verification or home appraisal, then you might still be in for a rate adjustment.
As a home buyer, it’s easy to get wrapped up in appraisals and offers and the competitiveness of getting the home you want at a price you can afford. But keep in mind that the interest rate and APR attached to the loan dictate your overall cost for buying the property, and are therefore just as important to negotiate.