Mortgate Rate Comparions: Why Lenders Offer Different Rates

Lenders charge different rates because they use different methods to price the loans, according to risk. The factors that go into determining the difference in lending rates include the use of an interest crediting index, such as the LIBOR, as well as the type of borrowers a lender is willing to accept and the company's overhead costs to do business.

LIBOR Versus Prime Rate

Banks choose to charge interest on loans based on a pegged rate, or underlying index rate. Banks use the U.S. prime lending rate or the London Interbank Offered Rate, or LIBOR, which is the rate that banks charge each other.

The spread between the LIBOR and prime rate can be 2 to 3 points. A loan that is tied to the LIBOR is much lower in cost, than one that is tied to the prime interest rate. This fact alone accounts for much of the disparity in interest rates charged by banks. The rate that a bank uses, based on either the LIBOR or prime rate, is the bank's preference.

Borrower Risk Factors

The risk of the borrowers who apply for mortgage loans is another reason for the difference in mortgage interest rates. A lender that takes on riskier borrowers, with low or bad credit scores, will charge higher interest rates on loans than will an institution that only accepts borrowers with perfect or near perfect credit.

Risk factors are measured by the borrower's FICO score, as reported to the 3 major credit reporting bureaus. Lenders use this information as a way to determine which borrowers it will provide loans to and at what rate.

Other Considerations

The amount of overhead that a company has is also an important factor when determining rates. For example, a larger corporation, with much overhead may have higher rates to be able to survive in a large market. A smaller company will not have the same amount of overhead and can pass on lower rates to their clientele. A lender with a low overhead ceiling and are efficient in processing loan request charge less in interest and fees than does a lender whose administrative process is not quiet as good.