Federal Rates

Mortgage interest rates are dependant on federal interest rates, which are influenced by the Federal Reserve. The aim of the Federal Reserve is to stimulate the economy while avoiding inflation, by setting terms for the federal funds rate (the interest rate which banks charge each other for short-term loans), and the discount rate, (the interest rate lenders pay to borrow from the Federal Reserve). The interest rates that banks pay directly influence the interest rates they charge consumers. If the Federal Bank sets a relatively low interest rate, lenders respond by lowering interest rates for consumers, which reduces the cost of getting a mortgage, enables more people to purchase property, and stimulates the economy.

How Banks Quote Rates

Mortgage interest rates charged by banks and other lending institutions are updated at least once a day, and are calculated based on Federal Reserve rates. These rates represent the cost of the loan to the lending institution, not the buyer, and the rates are often very similar if not identical from one lender to the next.

When a loan officer quotes you an interest rate, it includes not only the rate itself, but also their profit margin. Lending institutions usually set a minimum and maximum fee amount, and individual loan officers may have a certain amount of flexibility to choose the exact rate.

Getting Reliable Quotes

Lender quotes aren't necessarily reliable - lenders are under pressure to quote the best rates possible, and it's likely that at least one of those that you call will fudge the rate a little to keep you interested. Obtain application forms before you start shopping, and let the lender know that you can apply the same day you ask for a quote - that means the lender will be more likely to quote you a rate that they can actually deliver.

When you apply for a mortgage, lenders are required by law to provide you with a Good Faith Estimate within three days of application. However, the law does not require that lenders guarantee their estimates. Without the guarantee, an estimate isn't worth much, so make sure you ask lenders if they are willing to guarantee theirs.

Hidden Costs

Lenders are not required to disclose all costs in the Good Faith Estimate. Hidden costs include document delivery fees, notary fees, and processing fees, and these are often higher than they need to be. Hidden fees are often padded simply because they are hidden, and consumers are less likely to question fees they're not immediately aware of. Reduce the cost of hidden fees by requesting that documents be sent by regular mail rather than overnight delivery, or ask if documents can be sent electronically.

Locking in Your Interest Rate

Locking in the interest rate on your loan means that your lender provides a written promise to hold your interest rate at an agreed amount until the loan is processed. This means that if interest rates rise in the meantime, you can retain the lower rate. On the other hand, you also have to pay to lock in the interest rate, and if the rate goes down you're still locked into the higher rate.

Because loan interest rates are in a constant state of change, time is an important factor in pricing and locking in interest rates. This means that the longer you want to lock in an interest rate, the higher the fee you'll be charged for it.