Ever Wonder How Your Mortgage Rates Are Determined?

Pop Quiz.  Which of the following is a factor in determining your individual mortgage rate?

a) Your Loan Term

b) Ben Bernanke and the FED

c) The little old man behind the green curtain

One of the more frequently asked questions from borrowers is: What determines how high my interest rate will be?

The answer is both simple and complex.  There are several factors at play here…

In a word, what makes your interest rate higher or lower is risk.  Lenders set the price for the money they lend (interest rate) based upon the risk level of the loan.  If you (or your loan scenario) is considered risky, then a premium is added to the rate to compensate the lender for taking on that risk.  Likewise, lower rates are offered to borrowers with less risky scenarios (think prime rate).

If you answered (a) to the question above – congratulations!  You may be a real mortgage expert.  Watch the video below to see the rest of the factors that help determine risk level.

If you answered (b) – you’re close.  Although the FED makes decisions that effect the overall climate of lending, they do not have a direct influence on determining an individual’s rate.  This is determined by the lenders actually making the loan.  Watch the video to see the factors that determine just how risky you might be!

If you answered (c) – well, hmmmm… just watch the video.

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2 Responses to Ever Wonder How Your Mortgage Rates Are Determined?

  1. Steve Brooks says:

    Why are mortgage rates different from state to state, with the same bank, or mortgage company? A giant bank like Bank Of America has to have the same costs in all states right?

    • Banks and lenders will adjust their pricing (interest rates) from state to state. Each state has it’s own set of laws governing financial transactions (i.e. licensing laws, foreclosure laws, pre-payment penalty laws, etc.) Some of these laws make it more expensive to do business in a particular state (licensing & compliance). Some laws increase the risk level for the lender (foreclosure laws) causing a premium to be added to rate/price to compensate.

      Like real estate, lending is a local business….

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