How Are Today’s Mortgage Rates Determined?
The answer to this question can be complicated but stick with us and we’ll walk you through it. Mortgage rates are not solely determined by the lender. Instead mortgage rates are largely determined by the secondary market which buys mortgages from lenders, bundles them into pools of what is called Mortgage Backed Securities (MBS) and sells them to investors in the bond market (on Wall Street). When lenders sell their portfolios of mortgage loans, it frees up new money to lend to you when you want to buy a home. The investors that buy these securities are not usually the one you are sending your payments to, however, as they usually hire other companies to collect payment for them.
So then how are the rates determined? Essentially, these MBS's are looked at like regular bonds with a maturity date (loan payoff), risk, rate of return, etc. An investor is looking for a return on his/her investment so the market rate of the price investors are willing to pay and the return they are seeking determine the baseline rate, like a normal competitive market. From there, a lender may add a small margin for profitabily so that they are getting a return after the sell of that loan to the investor(s).
Why can’t my Loan Officer tell what rates will be from one day to the next?
We’re often asked what rates will be like tomorrow, or next month when a customer will be ready to buy. The short answer is that we don’t know what rates will exactly be like from day to day because of all the various market factors that come into play. We can often make educated guesses based on what’s happening in global and/or economic news, but often unexpected events happen that drive rates in one direction or another. It's similar to the stock market, and in many ways correlated. The rate is determined by investors and investors respond differently to various economic and political data.
What can I do to get the best rate?
The absolute best way is to work with a mortgage expert that understands and follows the securities markets well enough to guide you in the best direction. This is just another reason why working with a true mortgage professional will bring you additional benefit over working with someone inexperienced, or in a call center. However, if you insist on going at it alone, we reccommend keeping an eye on financial and economic news (PPI, CPI, jobs, GDP, earnings, etc.) so that you have a sense of what’s happening in the nation’s economy. When the economy is getting better and the stock market is rising, mortgage rates are likely to rise too. However, when there’s more bad news or uncertainty about the economy and the future rates tend to go down.
If you would like to discuss more about interest rates and what you might qualify for, contact me today for a free, no-cost, no-obligation prequalification.