It certainly is true for residential real estate that location, location, location is the dominant factor in the valuation of a property. As far as mortgages, all the hype about "rates" may be somewhat overblown. Why? Because, if a mortgage provider is going to be competitive in the marketplace, the underlying rate determination comes from similar factors. Lenders often use the same standard formula for common types of mortgages whether they are "fixed' or "variable" rate loans. That said, there are some special mortgages that have state or federal government support like CalHFA and VA loans, but these fit a particular audience.

Let's explore the concepts embodied in mortgage rates and how they apply to the hundreds of mortgage types in the market today. The idea here is to keep the discussion in layman's terms and is not meant to be a detailed statement of fact due to the variants that can apply. First, is the cost of money. Money has a cost or a value in the marketplace. We hear about the price at which currencies trade in global markets just by listening or reading financial news. The underlying value of our dollar is part of the equation, the current interest rates, of course, are a major factor, then access to these dollars or capital becomes part of the formula as well. For longer term mortgages, the rate calculation needs to reflect what the likely future value of the money loaned will be. This involves trying to assume what inflation will do.

Other costs that are more specific to the lender or type of lender, begin to add to the ultimate rate. There are costs of doing business for everyone in the chain, from offices, to supplies, staff, phones, management of the loan, to communication with any intermediaries. In other words, all the parts it takes to run a mortgage or mortgage broker business. Profits and commissions are most often added into the rate as well. Sometimes commissions may be paid up-front in "points". Here too, staying competitive will keep these costs inline across the lending entities be it direct from a primary lender or from a loan broker.

Let's look at the borrower, as they are also a critical part of the equation. Their credit worthiness is critical and can have a measurable impact depending on where they fall in the scoring calculation. There are relatively standardized calculations as well, such as FICO scores. If there are further questions about an individual's ability to pay, additional documentation like tax returns and other sources of income information may be required. This area is all about the projected risk that often affects the rate a specific borrower will pay. But, because there are such definitive calculations and metrics involved, it is likely that most the lenders will apply the same analysis to the rate determination. We could get into Prime and Sub-prime loans, but once again, the categories will be very similar across lenders.

If all these components of calculating a rate are so similar, what makes the difference in the rates that you hear about that are all over the map? Because all the lenders really have to achieve some level of profitability and they have costs of doing business, they ultimately tend to fall into a similar model to calculate the rate and a return on their investment. Some firms, in order to garner the business, will package the offerings so that they appear or sound very attractive to the potential borrower. The way they package the loan agreements may be very appropriate for a particular set of borrowers. It is probable that the lower start rate will be supplanted by a higher rate in the future to equal similar returns for the lending institution.

With the underlying calculations being very close for all lenders, the major differences occur in the type of loan which gates how and when you pay interest and principal and the borrower's ability, or perceived ability, to repay the home loan. The discourse here is meant to be a simplification for explanation purposes. The mortgage business has many facets to it and many types of organizations which may ultimately actually own the loan. In the United States there is Freddie Mac, Ginnie Mae and Fannie Mae that own billions of dollars of mortgages, and many of the "big" banks will own packages of loans which are often sold in the form of bonds.

As you can see, for all of its nuances, much of the mortgage business competes on the same footing when you are speaking to highly credible lenders. The caliber, concern and competency of the lender you communicate with and the institutions they work with becomes the key to your client securing the right rate and the right loan. For those real estate agents who want to provide the best service and add value with the right outcomes for their clients, a strong working relationship with the right lending team becomes an important part of their success. Rates do count, but the right loan with the right terms, and the right lending team working to help your clients all contribute to the optimum value for all the stakeholders in a residential real estate transaction.