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Why Are Mortgage Rates Different?

Different mortgage loan types

Mortgage rate Q A: “Why are mortgage rates different?”

Why is the sky blue? Why are clouds white? Why won t your neighbor trim their tree branches?

These are all good questions, and ones that often puzzle even the most savvy of human beings.

First things first, take a look at how mortgage rates are determined to better understand how banks and mortgage lenders come up with interest rates to begin with.

From there, you ll need to consider why mortgage rates are different for consumer A vs. consumer B.

No One Size Fits All for Mortgage Rates

Mortgages are complicated business, and there certainly isn t a one-size-fits-all approach in this industry.

First off, there are hundreds of different banks, lenders, and credit unions that offer mortgages, some of them entirely unique.

These companies compete with one another to offer the lowest rate and/or the best customer service. The well-known names might offer higher rates in exchange for their perceived trust and familiarity.

Meanwhile, the smaller guys might offer rock-bottom rates to simply stay in contention with the big players.

Along with that, every loan scenario is different (just like a snowflake), and must be priced accordingly to factor in mortgage default risk (risk-based pricing).

Put simply, the more risk, the higher the mortgage rate. But that s just the tip of the iceberg.

Mortgage Rates Vary Based on the Loan Criteria

Mortgage rates don t exist in a bubble – the parts affect the whole.

Banks and lenders start with a base interest rate (par rate) and then either raise it or lower it (rarely) based on the loan criteria.

There are loan pricing adjustments for all types of stuff, including:

The more you ve “got going on,” the higher your mortgage rate will be. And vice versa.

Mortgage rates also tend to be higher on jumbo loans and refinance transactions, especially those involving cash-out.

Advertised Mortgage Rates Are Best Case Scenario

You know those mortgage rates you see on TV or on the Internet?

Those assume you ve got an owner-occupied single family home, a perfect credit score, a huge down payment, and a conforming loan amount. Not to mention a newborn golden retriever with an unmatched pedigree.

Most people don t have all those things, and as a result, they ll see different mortgage rates. And by “different,” I mean higher.

How much higher depends on all the factors listed above. So take the advertised rates you see with a huge grain of salt.

Do Mortgage Rates Vary By State?

One last thing. I ve been asked if mortgage rates can vary from state to state, and the answer is actually yes. In fact, they can even vary by county.

But it might not be for any one reason, such as a higher default rate in state X or fewer natural disasters in state Y. Or more regulations in another state.

It s more to do with the fact that lenders want to increase their business in a certain part of the country, and thus they ll offer some sort of pricing special or incentive to drive rates down in say California.

So you might see a ratesheet that says .50% rebate state adjustment for loans in CA and FL, for example. This will give them a competitive advantage in those regions.

Conversely, you might see a pricing hit of .25% for another state like New Jersey or New York. In other words, rates can be priced both higher and lower depending on the state where the property is located.

Of course, if this results in unfavorable pricing you can just move on to a different lender that doesn t charge more for the state in question.

All the more reason to shop around. Compare mortgage rates online and speak with a mortgage broker or two.

Once you ve done that, check mortgage rates with your local bank or credit union (how to find the best mortgage rates).

Don t be one of the many that obtain just one mortgage quote, because you ll end up paying too much.