Mortgage 101: How Is My Mortgage Rate Determined?

Posted by Laine Smith on 1/18/16 8:29 AM

Topics: Economy

A big part of when you decide to buy and which lender you choose to finance with will likely depend on what mortgage rates are doing. Your mortgage rate not only affects the amount of interest you will pay over the life of your mortgage but can also influence the amount you are approved to finance, as well as your affordability of homeownership overall.

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Image courtesy of hywards at FreeDigitalPhotos.net

So how are mortgage rates determined? And why do they change?

Who Determines My Mortgage Rate?

Your mortgage lender will determine if you are approved for a loan and on what terms, but mortgage interest rates are largely determined by the secondary market. This secondary market is where mortgages are bought and sold.

Mortgage investors, like Fannie Mae and Freddie Mac, buy loans from mortgage lenders and sell them to Wall Street, mutual funds, and other financial investors who then trade them like securities and bonds. The actions of these secondary market financial investors collectively determine the interest rate on your loan.

What Influences Mortgages Rates?

The Fed

The Federal Reserve, aka “the Fed”, is the United States’ central banking authority and a key influential factor in the economy. The Fed reacts to economic events caused by inflation, recession, deflation and economic growth to stabilize prices. Rates are swayed by the Fed adjusting the supply of money circulating within the economy; more money supply, lower interest rates.

In December, the Fed decided to increase the federal funds rate, which has been in a target range near zero since 2008. While the Fed’s rate increase impacts shorter-term interest rates first, it does have to potential to eventually sway mortgage rates. See how the Fed rate hike could affect you here.

Inflation

Inflation is when there is an upward trend in prices that decreases purchasing power. Because inflation causes a surplus of dollars and decrease in profits, lenders must increase rates to preserve their returns.

Economic Growth

Indications of an improving economy include higher incomes, an increase in investments, and an overall influx of consumer spending. As the economy improves, there is typically a greater demand for mortgages and a decrease in supply of funds for loans, driving mortgage rates higher. In a downward economy, consumers are less likely in the market for a mortgage, driving down demand, increasing supply and placing downward pressure on interest rates.

Your Personal Mortgage Rate

Though the government, housing market, economy, and stock market cause mortgage rates to increase and decrease, there are personal factors that will cause interest rates to vary from borrower to borrower. This includes down payment amount, credit score, and points purchased by the borrower.

If you are interested in where mortgage rates are currently, contact one of our mortgage bankers. For more information regarding home buying and financing, download our free Mortgage 101 Handbook, a great resource for first-time and repeat homebuyers.

Download: Mortgage 101 Handbook

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