How Mortgage Lenders Make Your Mortgage Rate Quote

Gina Pogol The Mortgage Reports Contributor

Mortgage Rate Quote Depends On Each Lender

You’re shopping for a home loan and want today's mortgage rates.

So, you call up a lender. Usually two. Maybe even three or four — because you remember that television ad about when lenders compete for your business.

Each mortgage rate quote you receive is different.

Why is that? Are lenders pulling their rates from thin air? Are they trying to take advantage of you because you’re a first-time home buyer? Do they assume you don’t know any better?

The answer to all of these questions is a resounding “no”.

Mortgage lenders don’t “make up rates” on the spot, nor do they try to fleece you. Mortgage lenders, on the whole, are ethical, considerate, and concerned about earning your business.

There are actually a lot of valid reasons why mortgage rate quotes differ between banks. We’ll address them here.

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Lenders Control Some Parts Of Your Mortgage Rate

Mortgage rates are “made” based on the price of mortgage-backed securities (MBS), which are bonds bought and sold on Wall Street.

When bond prices rise, mortgage rates drop; and when bond prices drop, mortgage rates rise.

It actually is that simple.

Mortgage lenders — as the “salespeople” of mortgage rates — are really just the last leg; the middleman between the mortgage bond market and you, the consumer.

Middlemen all charges different fees for their services so this is why mortgage rates vary from bank to bank. It’s also the main reasons to get multiple rate quotes before you lock a mortgage rate.

Mortgage rates can vary by 25 basis points (0.25%) or more between banks.

So, how do banks set their mortgage rate “markup”. There are four main factors.

What is the bank’s current capacity for new business?

A mortgage lender’s ability to make new mortgage loans is often limited by its resources. Making a new loan requires people, time, and money — and banks have been reducing headcount since 2007.

When the lender is handling a lot of new loans, its already-scarce resources become more scarce. The bank’s way to slow new business, then, is to raise its prices.

During periods of ultra-low mortgage rates and during refinance booms, capacity gets strained and mortgage rates don’t drop as much as expected. This occurred most recently in May 2013, and again through early-2015.

What is the cost to originate your particular loan?

Originating a mortgage requires resources and using those resources comes at a cost. The cost is the same for loans of all sizes. However, the profit on a new mortgage loan is based on a percentage of the borrowed amount.

This means that a $300,000 loan costs the same to originate as a $50,000 loan, but yields a much larger profit. The same can happen with loans which exceed the conforming loan limit.

“Jumbo” loans, as these loans are called, cannot be banked through the government and, therefore, can be less profitable as compared to the $300,000 loan described above.

For all banks, there’s