One of the most complicated and confusing aspects of getting your mortgage is the actual rate you will pay. It is the first question you want answered, and nobody seems to give you an answer that is clear and crisp. So what is going on?

Here we'll explain this whole confusing area. With the understanding of what is really happening, you'll be in a much better position to select the mortgage company you want to deal with and will not be confused by advertisements of low rates?

The first step in understanding mortgage rates is an understanding of the parties that affect the rate.

There are, of course, a number of other parties who assist the big three in making a transaction happen. They include title companies, appraisers, loan processors, government entities, real estate agents and the like. Their role is to assist in various phases of the process, but none of them really has any impact on the rate.

To really understand how rates are set, you need to clearly grasp the role of the big three:

How do lender's affect rates?

We are starting with this one because it is the one easiest to understand and it is the base from which everything else is calculated. Lenders have a goal to get the most return they can at the least risk of loosing money. However, they operate in a highly competitive world. They are competing with all of the other lenders for the chance to loan you money and that competition forces them to keep their rates low. Lenders will make changes to their rates daily and in a very fluid market several times a day.

When you hear news that rates are going up, you are hearing about movement in the lender's marketplace.

How does your mortgage company affect rates?

Your mortgage company will affect your rate in three ways-by the lenders they choose to deal with, by the skill they have in selecting a program for you, and by the amount of money they make on the transaction.

Let's go through each of these in a little detail.

How do you affect your rate?

You have a tremendous impact on the rate charged. As we said at the outset, you are unique and you are the one who will repay a loan over a very long period of time. The uniqueness and length of time combine to create an element of risk. The higher the risk, the higher the rate you will pay.

Because the assessment of risk you pose is so complicated, it is very difficult for any mortgage company to tell you for certain how much you will pay. There are at least eleven different factors that determine your risk profile and go into the calculation of your rate. The first three are by far the most important.

	Your credit score. Credit companies track your credit history on other transactions you have done. These include credit card purchases, car loans, and any transactions with institutional lenders. Items in collection, bankruptcies, and late payment histories are all tracked and compiled into a credit score. Lenders are obsessive observers of credit scores.
	Your down payment. The more money you invest in the home the lower the risk of loss to the lender and the lower the rate you'll pay. The lender calls this the loan to value ratio.
	Your debt to income ratio. This is the amount of debt divided by your annual income. The more debt you have the greater risk you pose to the lender and the higher your interest rate will be.
The first three are by far the most important, but the following factors also can play a role:
	Owner occupied. If this is not your primary home, the lender has more risk and will increase the rate.
	Amount of the loan. The size of the loan will affect the rate. Little loans tend to cost more than big loans because they are more costly for the lender to deal with.
	Refinance or purchase. Are you borrowing the money to pay off another lender or are you buying a home. It costs the lender money to make new loans and they expect them to stand for a period of time. If you refinance they expect you will do it again and their costs will go up to replace your loan. Hence, you will pay a higher rate.
	Term of the loan. How long you are wanting the money will affect the rate. A loan that runs for 30 years is more risky than a loan for 15 years and will merit a higher interest rate.
	Variable versus fixed rate. If you allow the lender to increase the rate as rates climb in the future, you lower his risk and lower (temporarily at least) your rate.
	Second mortgage on the property. Will there be a second mortgage on the property. Even though the lender will have a first position, a second mortgage increases your debt load and his risk of problems. You'll likely pay a higher rate.
	Rate lock term. You will want to have the vendor lock the rate so it doesn't constantly move while you are finalizing the purchase. The longer the period you want locked, the greater risk to the lender and the higher premium you will pay.
	Waiving escrow. If you elect to not have the lender collect and escrow money for taxes and insurance from your monthly payment, you increase his risk and your rate.

Not all of these factors are used by every vendor on every loan and the change in rates can be fractions of a percent, but each factor can play a part in the rate you will ultimately pay.

Well, that's it. Probably a whole lot more than you ever wanted to know. However, you now are armed with knowledge that will help you properly evaluate the mortgage lender you will deal with.