How are Mortgage Rates Determined?
When you start looking for a home, one of the first things you’ll probably be interested in are current interest rates. You click into a site and some figures flash up on the screen. You may wonder why there’s such a large range of advertised rates and especially why you can’t get the rate you saw when your lender finally approves the loan.
In fact, did you ever wonder just how mortgage rates are determined in the first place?
It Starts with the Secondary Market
Fannie Mae and Freddie Mac are the nation’s biggest mortgage lenders. These huge institutions own nearly one half of the residential mortgages in the United States. They serve to make it easier for lenders, like your local credit union, to be able to offer mortgage loans by purchasing those mortgages, bundling them together, and selling them as mortgage-backed securities to investors.
In this scenario, everybody wins. You get the loan you want. The lender can get repayment on the mortgage right away, rather than waiting for you to make a series of drawn-out monthly payments. The investor has a stable asset that appreciates reliably over time, much like a bond.
Mortgage rates are determined on the secondary market by the investors trading mortgage-backed securities. Much like other traded assets, whose price fluctuates according to a variety of factors, mortgage interest rates go up and down daily.
Sometimes political news, like jitters over a meeting of the Federal Reserve, can trigger a temporary fluctuation, but mostly mortgage rates are tied to large-scale economic change. In a recessionary economy with low inflation, interest rates tend to be lower. When the economy is booming, rates tend to drift higher.
It Ends with You and the Broker
Unavoidable short-term fluctuations in the market are typically the reason your lender can’t offer the interest rate you saw advertised last month or even yesterday. However, market fluctuations aren’t the only thing that determines the rate you’ll receive on your mortgage loan.
Two other key factors that can really make a difference in how much interest you are going to pay over the life of your loan:
• Your Credit Score
The higher your score, the lower the interest rate you’ll qualify for. As the Loan Saving Calculator at My Fico illustrates, there is an approximately 1.5 percent spread between individuals with excellent credit (760-850) and those who have good credit (620-639). Having an excellent credit score can save you thousands of dollars over time.
• The Cost of Processing the Loan
When the broker tells you the interest rate, they may offer you the option of “paying points on” the loan to reduce the interest rate. Likewise, a lender might waive the origination fee if you don’t mind paying a slightly higher interest rate. These are two different ways of telling the buyer that the lender or broker’s fees influence the interest rate.
Whether you should pay to lower the rate, or waive fees for that matter, depends on how long you intend to hold the loan before refinancing. You should always calculate the long-term cost of higher interest payments against the short-term cost of lender fees before deciding what rate is best for you.
Residential Financing in Los Angeles
Peak Finance Company is a mortgage banker and broker specializing in solutions-based residential financing in the states of California, Oregon, and Georgia clients. Their approach to lending is personalized, focusing on the needs and circumstances of each individual. They pride themselves on delivering results while earning client trust.