Understanding How Lending Institutions Establish Your Personal Mortgage Rate

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While looking for a home loan, you may have noticed interest rates can vary widely among different financial institutions. Understanding a little about how these places calculate mortgage interest rates can help you make a more informed decision.

Your Three Main Lending Options

In general, there are three main categories of lenders out there for individuals seeking a home loan.

1. Commercial banks and credit unions

Your bank, credit union, or other retail banking entity is probably one of the first places you considered for a home loan. These types of direct lenders have competitive rates, but often have strict guidelines for their loans. In addition, their loans are often non-negotiable and set in stone.

2. Dedicated mortgage banks and loan officers

Dedicated loan banks and institutions take all risk onto themselves when they offer you a loan. They tend to have rates that are more flexible than commercial banks, even if they're subsidiaries of a commercial bank.

3. Mortgage brokers

Mortgage brokers look for the best rates among various lenders. They don't typically lend out the funds themselves, but they can connect you with lenders you wouldn't find on your own otherwise. They tend to offer the most flexible options.

How These Lenders Calculate Your Loan

Interest rates flow from the top down. Large financial institutions set their rates, and smaller institutions use that as a baseline. Each institution has its own formula for setting interest rates from there, which consist of many variables. However, no matter what interest rate the institution comes up with, your personal interest rate will rarely match it.

Once a financial institution advertises the interest rate they came up with, you may think it will apply to you. However, the advertised interest rates typically apply to an "ideal candidate." This is a person with really good credit, the right amount of available funds, and an excellent financial track record.

Most people aren't that ideal candidate. Instead, the financial institution must start with their interest rate, then change it based on your personal risk assessment. That assessment includes,

  • your credit
  • your assets
  • and the loan's terms.

Each institution has its own formulas, but they start with these basics. Knowing a little about how this process works can help you figure out what type of loan terms you will receive before you ever fill out an application.

This should also show you that credit is important, but it's not the only thing that factors into your rate. So even if you don't have the nearly perfect credit score of an "ideal candidate," you can still receive a decent mortgage rate. To find out more, speak with someone like Premium Mortgage Corp.