How do Lenders Determine Your Interest Rate?

By: Liz Freeman
February 25th, 2009  

Unless lenders all decide to work for free, loan originators have to be paid for their work. What makes pricing different from one lender to another?

1. How efficient the lender is — office space, Internet presence, marketing, in-office or centralized operations, and data processing capability can affect the lender’s profit margin.

2. Temporary market conditions — sometimes a lender needs to get in loans to keep employees busy, or increase market share in a particular area, even if it doesn’t profit from them. In this case it might offer funds at below market rates for a very short period of time. Conversely, a lender may be overburdened with business and may raise rates above the market to scale back on the number of loans in its pipeline.

3. Economies of scale — large lenders may be able to take advantage of centralized systems, which is useful in very busy times. Also, bigger banks or brokerages may be able to earn less per loan while maintaining profitability. On the other hand smaller shops may be able to cut back and run “lean and mean” when times are tougher.

Whatever goes into the pricing of your mortgage loan, shopping and research (I know, sorry!) are still the best ways to ensure getting the best of the “going rates” quoted.

Liz Freeman has more than a decade of mortgage lending experience. She writes about mortgage and finance issues and is a regular contributor to Mortgage News Daily and other publications.