If you’ve ever wondered why lenders have different interest rates, look no further! The truth is, rates vary in small amounts depending on the cost of creating a loan. Even lenders who work at the same company often have different interest rates. At the end of the day, all home buyers are trying to buy a home and all lenders are trying to close a loan. Let’s break down what costs are factored into giving a borrower a mortgage loan. 

The Cost of Creating a Loan

#1 Verification

Every lender will either need to build, buy, or rent a software license that verifies a borrower’s background and other information to see if they qualify for a mortgage loan. 

#2 Processing

Next, lenders work with an underwriter or processor to make sure banks are taking good loans that are profitable. They also make sure that payments are being made and on time. 

#3 Space

If a mortgage company is in a nice office building in a nice area, they have to cover the cost to rent that space. 

#4 Commission 

Lenders working from a call center usually offer lower rates but make little commission. This is because their company spends money getting buyer phone numbers which is also then factored into the cost. Lenders referred by a realtor are typically self generating loan officers that offer higher interest rates because they make more commission than call center loan officers. Self generating loan officers also might have an assistant which is factored into the cost. 

#5 Company Size

Lastly, a lot of mortgage companies have branch managers, district managers and regional managers under the owners who are shareholders. These people have to get paid from the loans and essentially a borrower’s mortgage payment which is another cost. 

Bottom Line

These are all costs the mortgage company has to pay whether a borrower closes a loan or not. If a company has high closing numbers, they will likely offer lower interest rates. If a company has low closing numbers, they will have to cover the costs by offering slightly higher interest rates to maintain profitability. It all depends on how much it costs to operate their company and how much commission the loan officer needs to make.

When it comes to buying a home, getting the lowest interest rate possible is essential to maximizing your long term and short-term budget. Locking in the lowest interest rate means you pay less interest over the duration of the loan and pay more money towards the principal amount. It’s important for home buyers to fight for the lowest rate, which means paying more out of pocket in order to benefit long term. However, the cost to pay down the interest rate is pretty hefty. Let’s see if the interest rate juice is worth the financial squeeze!

Par Interest Rate 

When you ask a lender for an interest rate, they will typically answer by providing a “par interest rate” which is the lowest rate they will offer you without charging you for it. If you lock in a rate lower than the par interest rate, then the lender considers it a loss. If the loan is considered a loss, you end up paying origination or discount points in order for the bank or lender to maintain profitability. 

The Five Factors of Buying Down the Rate

The cost is calculated based on five factors:

#1 Your mortgage scenario

Banks and lenders will determine the amount based on risk assessment. 

#2 Bank or lender 

It’s important to shop your mortgage because all mortgage lenders offer slightly different rates.

#3 Par interest rate

Remember, this is the rate a mortgage lender or bank gives you based on your scenario, risk, cost and commission they need to secure and profit from the loan. 

#4 Mortgage points

Mortgage or discount points are what a bank or lender will charge you to give you a rate below their par interest rate. It’s basically a built-in cost the bank charges you to buy down the rate and maintain profitability. 

#5 How much the market pays banks to buy the rate that day

Connect with your lender on a weekly basis to see where rates are at. Rates can change by the minute, day or week.  You can shop for lower interest rates during the home buying process all the way until you’re in escrow and lock the loan. 

How Much Does It Cost Buy Down the Rate?

This depends on the five factors listed above. However, you can get a general idea of how much you might pay by calculating the cost of a mortgage point. Remember, every bank or lender varies with how many points they will charge for giving you an interest rate that’s lower than par. Let’s break down how to calculate the most commonly charged mortgage points. 

50 basis points= 0.5%

75 basis points= 0.75%

100 basis points (1 point) = 1%

150 basis points= 1.5%

200 basis points (2 points) = 2%

In order to factor the cost and points together, you will need an exact loan amount on a loan estimate provided by your lender. 

Here’s an example scenario: 

  • Your lender offers you a $400,000 loan amount and a par interest rate at 3.25%.
  • You want a 3% interest rate before market rates start to rise. 
  • Your lender charges 150 basis points (1.5%) for the difference between the par interest rate (3.25%) and the interest rate you want (3%).
  • To calculate your out-of-pocket payment, take your loan amount and multiply it by the given basis point percent.
  • $400,000 X 1.5% = $6,000 rate charge 

Here’s an example for 100 basis points (1%):

  • $400,000 X 1% = $4,000 rate charge

Here’s an example for 50 basis points (.5%):

  • $400,000 X .5% = $2,000 rate charge 

Bottom Line

Depending on your loan scenario, your lender will charge you to buy down your rate with mortgage points based on percentage or basis points calculated from your loan amount. Don’t forget to shop your mortgage with different lenders, it’s the easiest way to potentially save thousands of dollars when buying a home!


Finding your dream house is easily the most exciting part of the home buying process. However, this excitement can quickly turn into heartbreak if you get approved for less than the purchase price, or your offer falls through in today’s competitive market…it happens more than you think. The key to avoiding this heartbreak is knowing how much you can afford before you start looking for a home

The best advice I give to all homebuyers is to fall in love with the payment before you fall in love with the house.

Trust me, you are setting yourself up for success when you start the homebuying process knowing how much home you can afford. A lot of home buyers make the mistake of looking at homes before getting an official offer from a lender AND an underwriter. The underwriting process can take weeks to finalize and potentially delay closing. Here’s everything you need to know about mortgage pre-approvals and underwritten approvals before you start looking at homes and especially before you start making offers.  

Pre-Approved vs. Pre-Qualified

There’s a common misconception that one is “better” than the other when it comes to getting your offer accepted by a seller. In reality, there aren’t a lot of differences between the two. In fact, every lender defines the two differently, or uses them interchangeably. Let me break them down for you in general terms. Both “pre-approved” and “pre-qualified” refer to a letter from a lender offering an estimated loan amount based on their review of a borrower’s financial documents, including a permitted credit check. Think of the letter as an opinion and not a fact when it comes to a guaranteed loan amount.  This can be helpful for potential home buyers that want a general idea of how much they can afford before they commit to starting the home buying process. 

Underwritten Approval

Underwriting is one of the final steps in the home buying process that usually takes the longest. This is because a certified underwriter has to verify the accuracy of the borrower’s documents and information. They assess the amount of risk a lender or bank takes by giving the borrower a mortgage loan. If everything is cleared, they will pull an updated credit score and finalize the loan. If there are any errors, they won’t finalize the loan until they’re resolved (which can take a while and delay closing).

The fastest way to finalize the closing process is to get an underwritten approval before you find a home and make an offer. Most lenders won’t bring up underwriting until closing. When you send your documents to a lender, ask them to also submit your documents to an underwriter for approval. If everything is verified, the underwriter approves the loan amount and clears conditions before you ever make an offer. That way when you find your dream home, you already have an approved offer that stands out to sellers in today’s competitive market. Once the seller accepts your offer, you can close in as little as 21 days! 

Bottom Line

Getting an underwritten approval might seem like more work than necessary, but it’s worth it to save time and have that peace of mind when buying your dream home. 


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