SANTA CRUZ (May 2, 2009) - It should come as no surprise that everyone does not get the same interest rate. Because there are many variables involved and factors to consider when quoting mortgage interest rates, similar borrowers obtaining similar mortgages from the same lender may receive dissimilar interest rates.

It is a common economic principle that a business transaction that represents higher risk commands a higher rate of return for the party accepting that higher risk. Nowhere is this concept more real than when it comes to the rates that borrowers receive for their mortgages. Those borrowers that are perceived to represent greater risk will pay higher rates.

I use the word ‘perceived’ because no one really knows for sure whether or not one borrower’s situation represents more risk to the lender than another borrower’s situation. I believe that mortgage pricing is based on a combination of statistical analysis of tens of thousands of borrowers’ individual circumstances, situations and outcomes and some ‘gut feeling’ analysis of mortgages that have resulted in defaults and foreclosures.

Based on these studies lenders have developed a detailed and complicated matrix of factors that will affect the perceived risk that lenders face when offering mortgages to refinancing homeowners and homebuyers. A good example of this is taking into account credit scores when pricing a mortgage. Borrowers who have credit scores above 740 will receive the best pricing.

Each borrower is assigned one credit score by each of the three nationwide credit bureaus (TransUnion; Experian, Equifax). It is the middle of these three scores that is used by lenders to determine the projected risk. In the case of a working couple obtaining a mortgage, it is the lowest middle score between them that is used to determine loan pricing.

I recently arranged the mortgage for a couple buying a home. His middle score was over 740 but hers was 700. With a 20 percent down payment, the added cost to this couple for a ‘low score’ was 3/4 of a point. For their $600,000 loan, that lower score cost them $4500! If her score had been below 700, the additional cost would have been $9,000! Or, converting an additional one point to interest rate, the cost to the borrower can be as much as one half of one percent. For a $600,000 mortgage, that difference can raise the payments by $180 each month!

The loan-to-value ratio (LTV) also plays a huge role in pricing. The higher the LTV, the higher the risk. Given a score of 700, a LTV ratio of 80 percent will cost a borrower one point more than if the LTV was at 60 percent. In the case of loan amounts above $417,000, borrowers will have to add another additional cost of 1 point for receiving ‘cash-out’ from a refinance. Cash out is defined as receiving any money from a refinance on a loan amount that is above and beyond the sum of the amount owed on the present 1st mortgage plus closing costs plus $2,000. There is an exception made if the 2nd mortgage was used to purchase the home.

These are just some of the factors that affect mortgage pricing. Needless to say, credit history plays a big part and it is an area that consumers have at least some control over. By not spending more than can be paid back and by making payments on time borrowers can improve their chances of not only obtaining a mortgage but also of obtaining the best mortgage rates available.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.