Advertised Mortgage Rates Vs. Actual Rates: Why Your Rate May Be Higher Than Advertised

When you’re shopping around for a mortgage loan, a lender may offer you an interest rate that’s different from what’s displayed on their website. Don’t worry – this doesn’t make you a victim of false advertising. Multiple factors – personal and otherwise – determine your mortgage rate.

Let’s break down the factors that go into your mortgage rate, why lenders advertise rates and how the market can affect the rate you ultimately get. 

Why Is My Mortgage Rate Higher Than Average?

When you get a mortgage, rate adjustments are often made based on the characteristics of your individual loan. All mortgage types start with a base rate, generally based on the individual financial institution’s prime rate, then your rate is adjusted based on various factors, including:

Every factor mentioned above influences how much you pay at closing in order to qualify for a certain rate.

Using Discount Points

Home buyers can pay certain fees to lower their mortgage rate. These fees are called discount points, or mortgage points. One discount point is equal to 1% of the total loan amount. You can buy discount points in increments as small as 0.125 points.

On a $200,000 loan, if you had to pay 0.5 points to get a rate of 4.125%, you would pay $1,000 in fees to secure that rate. Conversely, if you want to keep your closing costs as low as possible, you can take a higher rate and have the lender give you a credit toward your closing costs.

Understanding Advertised Mortgage Rates 

Now that you know how lenders get to your rate, what exactly are those rates on the lender’s website?

An important part of getting a mortgage is shopping around and comparing lenders. To attract potential borrowers, lenders will publish rates on their website, even though your actual mortgage rate could look much different. 

When you look at a lender’s mortgage rates page, it’s important to take note of some key terms, which you can learn more about below.

Interest Rate Vs. APR

First, you’re going to want to look at the difference between interest and the annual percentage rate (APR).

The lower rate you see on the page is the rate of interest on the mortgage. The APR considers the interest rate plus the additional closing costs and other fees over the life of the loan. The bigger the difference between the interest rate and the APR, the higher the fees the lender may charge.

Rate Assumptions

Because the rate a lender gives you on their website can’t be personalized for your situation, the lender must base this rate on something. Somewhere on the website, you’ll likely find listed assumptions affecting the rate. These assumptions typically include the same factors mentioned earlier: type of transaction, loan amount, credit score, down payment size, etc. 

Do Mortgage Lenders Ever Match Rates?

Mortgage rates depend on the current market and your personal financial information, but you may still have room to negotiate. Compare different lenders’ rates and see if you can make a case with your lender for a lower rate. If nothing else, you could be able to negotiate a lower origination fee or other closing costs.

Understanding Mortgage Bonds

Let’s talk about how the mortgage market works and how the risk of any given loan is measured to get to your interest rate. 

When you get a loan, it’s typically pooled into a big group of loans with similar characteristics (e.g., conventional 30-year fixed-rate mortgages with a 720+ credit score and a 10% down payment) before being sold on the bond market to one of the major mortgage investors. These pools are referred to as mortgage-backed securities (MBS). There might be $10 million worth of loans in a particular MBS.

If you get a conventional loan, it means Fannie Mae or Freddie Mac purchased it. Otherwise, the loan typically gets purchased by a government agency. This is the case with FHA, USDA and VA loans. These agencies also have certain requirements for the types of loans they’ll buy because they take on the foreclosure risk that helps provide investor liquidity for the next step in the process.

Once the investor buys the loan, the mortgage-backed securities then become available on the open market. The mortgage investor guarantees to make payments to the bond buyer each month for interest and principal. Each bond is priced according to movements in the market and loan type (e.g., rates on VA loans tend to be a bit lower).

The Bottom Line

Numerous factors can influence how different your actual mortgage rate will be from what you’re expecting. Because a borrower’s actual rate can be so personalized, it’s hard to really know what you’ll end up with until a lender sees all your information.