How do lenders or brokers determine what mortgage rates to quote borrowers? (Source: loanDepot)

A lender may get daily rate sheets from their secondary marketing department or from wholesale mortgage lenders. These mortgage interest rates are usually not for public view, because they show the price of a home loan before the retail mark-up.

On the rate sheet, incremental mortgage rates correspond to the cost of the rate expressed in terms of “basis points”. One point is equal to one percent of the loan amount.   

The rates with numbers in parenthesis next to them indicate “rebate” points paid to the lender for selling a loan at a premium. The rates without numbers in parenthesis show the lender’s “cost” to sell a loan at that particular interest rate. The rate with corresponding zeros is the “par” price, which means the lender incurs no cost and they receive no rebate points for that mortgage interest rate.

Lower mortgage rates have a higher up-front cost because the mortgage holder earns less interest over the term of the loan. Conversely, higher rates have lower short term costs because the mortgage holder will earn more in interest over the life of the loan, rather than points paid up-front. 

In order to quote mortgage interest rates, a loan officer or broker adds points to the wholesale rate sheet pricing, which is essentially a commission. The lender normally sets a policy on the minimum and maximum points the loan officer adds to the rate cost. This pricing structure provides flexibility to offer lower mortgage rates with higher points, or a zero point mortgage at a higher rate.

Current rates on a lender's website have already been adjusted to show a retail price.