Most consumers of mortgage loans are "blinded" by interest rates in advertising and understand little about what creates the rate.  Understanding how lenders make their money and how loan programs work adds clarity to the process and simplifies the shopping and negotiation process.

To simplify it you must understand that the "Market" meaning that ultimately investors on Wall Street create demand for investment instruments and mortgage backed securities are one of these.  When demand rises rates drop.  When demand diminishes interest rates increase.  It is the same for every lender in America.  So in theory, every lender is selling the same rates. 

So why are they different?

Lenders generally make their money from charging upfront fees on the loan (e.g. discount points, origination fees, doc prep fees, underwriting fees etc) or by selling you a higher interest rate for which Wall Street will pay backend fees (kickbacks) to the lender. 

That means they either charge you upfront fees for a low interest rate or  sell you a higher interest rate with lower upfront fees and get backend fees.  Sometimes it is a combination of the two. 

For example:  If Wall Street is looking to invest in 30 year fixed rate mortgages at 4% they will buy 30 year fixed rate loans that the lender sells to borrowers at 4%.  The lender makes money by charging you fees upfront.  However, most lenders will sell you a 4.375% loan and charge fees upfront that way Wall Street sends them money back for the premium .375% on the loan.  This is how lenders increase their profits.

In simple terms you pay one way or another.

Okay so how do you get the lowest rate possible?  Aside from having good credit and a sizable down payment paying fees like discount points and origination fees will lower your interest rate.  The more you pay upfront the lower the rate.  You have to decide if paying these fees upfront makes sense so you need to calculate the break even point for the reduced payment vs. the upfront money.  Usually this is about 5 years. 

Another way to get a low rate is to look to adjustable rate mortgages.  The rates are low because the investor is protected against inflation if rates rise in the future.  Some of these are fixed for 5 to 7 years before they adjust.  While they have been bad mouthed by the press recently they are actually quite effective for saving money especially if you don't plan on being in the home more than 5 to 7 years.  However, you need to compare the cost benefit vs. a 30 year fixed rate. 

Each lender will quote you a similar though not the same rate for any given program.  You need to get quotes from multiple lenders for similar programs along with a Good Faith Estimate which shows you the fees you are paying for that loan.  Compare them apples to apples to see if they are really the same.  Then it is up to you to negotiate with your lender for a better rate.  Sometimes just asking will get you a discount or even a reduced fee.  However, lenders are working against a fixed cost so they can only do so much not to mention loans are ever more difficult and time consuming. 

Remember rates change continually.  So until you "lock" in your rate it may change from day to day.  You need to compare lenders on the same day.  Ask your lender if they have the ability to float the rate down if interest rates go down after you lock.