What Actually Moves the Rate You Are Quoted

Two people walk into the same office on the same morning, ask about the same house, and leave with two different rates. Neither of them was treated badly. They handed over two different files.

There is no such thing as "the" mortgage rate. The figure you read in a headline is an average of quotes given to borrowers who are not you, on a property that is not yours, for a loan you may not be taking. What you will actually be offered is that average moved up or down by a specific, knowable list of things.

This article quotes no rate on purpose — any number printed here would be wrong within weeks, and the mechanics underneath it will still be right in five years. Here is the whole list, and which parts of it you can do anything about.

A Quote Has Two Halves

Every rate quote is the sum of two independent things. The MARKET decides roughly where all mortgage rates sit this week — the neighbourhood. YOUR FILE decides where inside that neighbourhood your loan lands — the address. Mixing the two up is what makes rate shopping feel arbitrary.

You cannot argue with the neighbourhood. You have more say over the address than almost anybody realises.

The Market Half, and Why the Fed Is Not Your Mortgage Rate

The most persistent misunderstanding in this subject is the Federal Reserve. The Fed sets the federal funds rate, which is what banks charge each other for overnight lending. It is not a mortgage rate, it is not tied to one by any formula, and a cut to it does not hand you a cheaper thirty-year loan.

What thirty-year mortgage rates actually track is the market for mortgage-backed securities — bundles of home loans that investors buy — and those move with long-term expectations about inflation and growth, which is also why they tend to travel in the same direction as the ten-year Treasury yield. When investors will accept a lower return on that paper, mortgage rates fall. When they demand more, rates rise.

The practical consequence is worth holding on to: mortgage rates frequently move BEFORE a Fed announcement rather than after it, because the market has already priced in what it expects. Waiting for a headline is waiting for news the bond market read last month.

The Six Things About You That Price the Loan

On a conventional loan the adjustments are not improvised. Fannie Mae publishes a loan-level price adjustment matrix — a grid that prices a loan on credit score against loan-to-value — and lenders price from it. That is the machinery behind most of the list below.

• Credit score. The single largest borrower-side adjustment on a conventional loan, and it prices your mortgage insurance as well as your rate. It is worth reading on its own.

• Loan-to-value. How much you are borrowing against what the house is worth. More equity means less risk to the lender, and the pricing improves in steps rather than smoothly — being just over a threshold costs real money.

• Occupancy. A home you will live in prices best. A second home prices higher, and an investment property higher again, because those are the loans people stop paying first when money is tight.

• Property type. A single-family house is the baseline. Condominiums and multi-unit properties carry their own adjustments, and a condo project has to satisfy the lender as well as you do.

• Loan size. The Federal Housing Finance Agency re-sets a conforming loan limit every year. Under it, your loan is a conforming loan priced off that matrix. Over it, it is a jumbo — a different product with different rules and its own pricing.

• Debt-to-income. What you already owe each month against what you earn before tax. It mostly decides whether the loan is approved at all, and at the margins it prices it too.

Four of those six are fixed by the day you apply. Two of them — your credit score and your loan-to-value — are the ones people can genuinely move, and both of them respond to the same thing: time and a plan.

The Program You Choose Is an Input Too

The four major programs price differently, and comparing a quote from one against a quote from another without noticing is the most common way buyers conclude a lender is expensive.

• Conventional: Priced off the adjustment matrix above, so your score and your equity do most of the work

• FHA: Government insurance behind the loan, which often produces a lower note rate — and a mortgage insurance premium that is the same for everybody

• VA: Backed by the Department of Veterans Affairs, frequently the sharpest pricing available to an eligible borrower, and with no monthly mortgage insurance

• USDA: For qualified buyers and eligible rural properties, with its own guarantee fee in place of conventional insurance

A rate is also only half of what a loan costs. Our FHA versus conventional comparison prices both programs on one $350,000 house and shows the lower rate losing to the higher one once the insurance line is included — which is the reason a quote should always be compared as a payment rather than as a percentage.

Points: Paying Today to Lower the Rate

A discount point is the one lever that changes your rate at the table rather than over months. The definition is exact: one point is 1% of the loan amount, paid at closing, in exchange for a lower rate for the life of the loan.

What one point costs, by loan size:

On $250,000

$2,500

On $332,500

$3,325

On $400,000

$4,000

On $500,000

$5,000

Work out whether points pay for you

How much rate a point buys is not a fixed exchange. It is whatever the lender’s rate sheet says that morning, and it changes with the market. So the only useful way to judge points is a breakeven, and the arithmetic is simple.

Take the $332,500 loan — a $350,000 house with 5% down. One point costs $3,325. Suppose, as an illustration rather than a quote, that it lowers the payment by $65 a month. Divide the cost by the saving and the point pays for itself in about 51 months: a little over four years. Keep the loan longer than that and you are ahead; refinance or sell before it and you paid for a rate you did not keep.

Points are a bet on how long you keep the loan. Nothing else about them is complicated.

The Lock Period Is Part of the Price

The last input surprises people: how LONG you want the rate held is itself priced. A lender guaranteeing a rate for sixty days is carrying more risk than one guaranteeing it for thirty, and that risk shows up in the quote.

The whole mechanism — what a lock protects, what expiry costs, what re-prices a locked loan — is its own piece: rate lock, explained. The short version for this article is that comparing two quotes with different lock periods is comparing two different products.

What Any of This Lets You Actually Do

Five things follow from the list above, in the order they are worth doing:

• Compare quotes on the same day, the same program and the same lock period, or you are not comparing.
• Compare payments rather than percentages, because insurance and fees live outside the rate.
• Work on the two inputs you own — the credit score and the loan-to-value — before you shop, not after.
• Treat points as a breakeven question, not as a discount.
• Stop waiting for the Fed. It is not the market your rate follows.

Alliance Lending Services writes conventional, FHA, VA, USDA and other mortgage programs, so a loan officer here can price the same file four ways and tell you which of the six inputs above is costing you the most. That takes one conversation, and today’s number is the one part of this that has to come from a person rather than a page.

This content is for educational purposes only and is not a commitment to lend. No interest rate is quoted here: rates move daily and are set per borrower, per property and per lender, so any figure printed on this page would be an example rather than an offer. All figures shown are examples and every loan is subject to credit approval and program guidelines. Alliance Lending Services, NMLS #304510. Equal Housing Opportunity.