How Mortgage Interest Rates Work
If you are considering a home mortgage, chances are that you woke up today and wondered what the mortgage interest rates would be if you signed on the dotted line. It seems like an easy question to answer, when in reality it isn’t quite as simple as knowing one rate. There are multiple rates and while the rates may be very similar, even identical, with each lender there is no guarantee. Not just that, the rate may change before you has driven to the bank anyway.
So where does a mortgage interest rate start? It begins with the fax machine in your home mortgage broker’s office. Every morning they will receive a fax that lists the day’s rate. On very active days it is not unusual to see this rate change several times throughout the day. There have been times when the rate has changed up to five times a day. These rate sheets are not for the public to see. They display only the rate that the loan officer is going to be paying more that home mortgages, not the cost presented to you.
The different rates have different costs. Higher mortgage interest rates won’t cost as much to the loan officer as a low mortgage rate would. This is due to the fact that the lender will earn more in interest on the home mortgage if the mortgage rates are higher. On the other side, it makes sense to charge more for a low mortgage rate since the lender will earn less interest in the long term. In some cases the home mortgage is considered to have a “rebate.” If the mortgage interest rate is high enough the loan officer will get paid back for issuing the loan at that rate.
A large majority of home mortgage lenders are paid on commission. The lender and the loan officer split whatever amount is earned off the home mortgage loan. So before quoting you a mortgage interest rate the loan officer will add in the amount that they want to earn. The individual company will have a policy on how much or how littler can be added. While this reigns in the loan officer, it still gives them a lot of flexibility with the mortgage interest rate.
In this way, it may seem that the loan officer’s goal would be to get you the highest rate possible. To some extent, this is true. But home mortgages are still a business and like any good business they do not want to overcharge their customers either. Your credit score will determine the amount of flexibility you get with the mortgage interest rate. The better your score, the more likely it is you will get a lower rate.