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Refinance Purchase Home Equity

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How Do I Understand Mortgage Interest Rates?

By Kevin Landis

Everyone should understand mortgage interest rates to obtain better quotes when applying for loans. The way lenders approve loans is surprising.

To understand mortgage interest rates better, consider the loan process from the eyes of a lender. All lenders have an internal cost for accumulating money to loan. Thereafter, when loaning money, several factors combine to determine rate charges.

Lenders Set APR for Each Applicant

Each lender determines the APR charged on individual loans. To understand mortgage interest rates, it is helpful to consider a lender’s point of view. All loans are made with the intention of earning a profit. The amount of profit made on each loan is a function of the increase the lender charges above the cost of obtaining money to loan. In addition, lenders also must pay for the cost of business operations and provide allowances for loan losses when customers cannot repay debts. The combination of these three factors ultimately determines if a loan is approved, the amount of a loan, and the APR required by a lender.

Understand Mortgage Interest Rates are Influenced by Personal Factors

The amount of risk a lender assesses is determined by analyzing each application carefully. Financial analysts evaluate current cash flow, net income, the ratio of debt payments to current net income, and many other factors. Almost all borrowers understand mortgage interest rates are also necessarily influenced by FICO scores. During the review process, lenders assign a degree of risk to each application that is used to determine the actual APR used in the loan approval process.

Government Influences Rates

The cost of money for lenders depends on several factors as well. The Federal Reserve System loans money to banks on an overnight basis for a very low rate known as the Fed Fund Rate. So long as a bank passes regular examinations conducted by federal or state regulators, the bank may continue borrowing overnight funds to continue operating. The rate charged by the federal government indirectly influences the APR eventually offered to customers.

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3. What Interest Rates Determine Mortgage Rates?
4. Should I Consider a Refinance Now with Mortgage Rates Increasing?
5. What Interest Rates Determine Mortgage Rates?