Precisely why do lenders offer different mortgage interest rates to different people? Let’s find out.
A Small Difference in Your Mortgage Rate Percentage Can Have Big Financial Implications
First off, you should be aware of just how much the mortgage rate percentage can differ. Even a small percentage difference in mortgage rates can cost you a lot more money. For instance, suppose you put down 10% as a down payment on a $200,000 property and pay the loan over a period of thirty years. If your mortgage rate is 3.5%, you would pay $110,981, whereas if the rate is 4.5%, you would pay $148,332. That is a difference of $37,351, which is obviously a lot of money.
You will want to get the best rate that you can for your mortgage, so it is important you compare different lenders for varied mortgage rates. However, you also need to consider other variables. For instance, in addition to the interest rate, you will have to pay fees, and each lender charges different rates. Make sure you have a full picture of the cost of the whole loan, including all estimated fees, before you sign on the dotted line.
The Risk You Pose Matters to Lenders
The primary reason why different mortgage lenders offer different rates is to do with homebuyers’ financial situations and how much of a risk they pose. Specifically, it is your credit score, your debt-to-income ratio, and the amount of your down payment that play the most pivotal roles in lenders determining your mortgage rate. Your personal financial data informs the lender as to how much risk the lender faces in allowing you to borrow the money. So, if your credit score is low and you are found to be at a higher risk than other applicants, your mortgage rate would most likely be higher than someone who has an excellent credit score and is in financial good standing.
If you improve factors like your credit score, you will be able to get a mortgage rate of, say, 3%, rather than 3.5% or 4%, and you have already seen how much of a difference a variation in percentage can affect your monthly payments.
The Type of Loan Affects the Mortgage Rate Offered by Lenders
In addition to your personal financial situation, the type of mortgage loan you get can make a difference in the rate of your mortgage payments. Quite simply, a loan with a longer life term will have a higher mortgage rate. So, you would have a higher rate for a thirty-year mortgage than you would for a fifteen-year one. If you go with a zero-down loan program, you will also have a higher mortgage interest rate.
Mortgage Lenders Can Set Their Own Standards for Determining Your Mortgage Rate
While models that are used for assessing risk, which includes things like your credit score and debt-to-loan ratio, are set by financial giants, each individual mortgage lender can set its own standards. As each lender can implement its own specific model for assessing risk, which in turn determines the mortgage rate, it means one lender could be more interested in, say, your debt-to-loan ratio and base its decision primarily on that, while another lender would be much more interested in your credit score for determining your mortgage rate.