Understanding Why Mortgage Interest Rates Vary


Whether you are a first-time home buyer or have purchased a home previously, understanding why interest rates vary can seem confusing. But how much you pay in interest definitely affects how much your mortgage payment will be each month. Therefore, it helps to know what goes into a mortgage rate and why they vary.

Why Rates Vary by Borrower

There is no set mortgage rate for every borrower who applies for a mortgage loan. Lenders may advertise competitive rates, but the rate you actually pay will depend on your:

  • Credit score

  • Income

  • Debt-to-income ratio (monthly debt payments compared to your gross monthly income)

  • Loan-to-value ratio (loan amount divided by the home's value)

Lenders also consider the amount of money you want to borrow, the type of home you want to buy (e.g. single- or multiple-dwelling), and how much of a down payment you can make when offering you a mortgage interest rate. Whether you pay points will affect the interest rate as well.

A lender generally offers you a lower interest rate if you pay points (1 point equals 1 percent of the loan amount). Points are a fee you can pay at closing to lower your monthly mortgage payment. The lower the mortgage interest rate a lender offers you, the lower your monthly mortgage payment will be.

Why Rates Vary by Lender

Mortgage rates vary by lenders who are competing against each other for your business. Even FHA rates vary among lenders. Some mortgage lenders focus on offering the lowest rates; other may charge higher interest rates in exchange for exemplary customer service or a trusted name in banking.

Since you can choose from a wide variety of banks, credit unions, and other mortgage lenders, there is no need to get only one quote. Chances are that not shopping interest rates or requesting quotes from more than one lender will cost you money because you may be paying more than you have to pay.

The interest rates on home mortgage loans can change from one day to the next. But even a rate that is a fraction of a percent lower can save you money each month – not to mention over the lifetime of the loan.

For instance, if a lender offers you a fixed interest rate of 4.50 on a mortgage loan for $150,000 over a 30-year term, your monthly mortgage payment will be $760.03 However, if another lender offers you a rate of 4.25 on the same loan amount, the payment will $737.91 a month. You will save $22.12 a month, yielding an annual savings of $265.44.

Why Rates Vary by State

Since each state has its own laws governing mortgage loans, mortgage interest rates also vary by state. In some states, including Alabama, New Jersey, Pennsylvania, Texas, and Vermont, mortgage lenders aren't allowed to charge borrowers prepayment penalties. Other states limit the amount of the penalties lenders can charge.

Also, in states with Homestead laws, mortgage lenders are prohibited from charging certain loan fees. Therefore, in cases like these, to make a profit and reduce the risk involved, lenders often charge higher interest rates. For more information, contact Premium Mortgage Corp or a similar company.


30 March 2016

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