How are Mortgage Rates Determined

How are mortgage rates determined? If you are considering buying a home, or thinking about refinancing your existing residence, one of the key factors in your decision involves the current mortgage rate. A low interest rate can save you tens of thousands of dollars over the course of your loan. If you have ever wondered how mortgage rates are calculated, the answer is a complex one. Many government organizations play a role, including the Federal Reserve, the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Government National Mortgage Association ("Ginnie Mae") and others. A key factor in the determination of rates is the yield of the ten-year Treasury bond. A common mortgage type is a 30-year fixed-rate product. Because many mortgages are either paid in full or refinanced in ten years, the activity of the ten-year bond serves as an indicator of future trends. In addition to their reliability as an indicator of upcoming developments, ten-year bonds are backed by the U.S. government. These bonds are also known as mortgage-backed securities.

When you obtain a mortgage from your bank or lending agency, your mortgage is often sold soon after to an organization that will package your loan with others to create a mortgage-backed security. In turn, the mortgage-backed security will be sold to certain types of investors, including institutional investors and mutual funds. Returns on the security are generated by the collection of the homeowners’ principal and interest payments.

Inflation also plays a role in the determination of mortgage rates. If experts believe inflation is set to increase, interest rates will also rise. On the other hand, interest rates will stabilize or fall if inflation does the same thing.

Supply and demand is another factor in rate calculation. When there is a high consumer demand for mortgages, lenders typically charge a higher interest rate. When demand is down, as has been the case in much of 2008 and 2009, lenders may be inclined to offer a somewhat reduced rate.