The Secret Behind Mortgage Interest Rates
A Home Buying Article Contributed by Elizabeth Fox-Wise
Mortgage Rates are Not Arbitrarily Determined
Although extreme fluctuations in the market can make mortgage interest rates seem like they are randomly pulled from a hat, they are not arbitrary numbers assigned at will by those with the money.
Mortgage lenders will say that the most common question received by their office daily is "what is your rate today? ". The answer to that is always that there is more than one rate on any day. There is always a choice of rates. However, the mortgage seeker will realize that the rate from lender to lender is usually very similar and often identical.
The Mortgage Rate Determination Process
Every morning the lending institution will get a Loan Officers Rate Sheet. On volatile market days, there may be changes made to the rate sheets during the day.
The Loan Officers Rate Sheet is not available to the public. They are distributed to Mortgage Bankers and Mortgage Brokers only because these are the rates that the loans are available to the lending institution at, not to the general public. This can be equated to the wholesale suppliers list which go out to their retail accounts. They represent the cost of the product to the retailer not to the customers. That wholesale price list is not for the public's eyes and neither is the Loan Officer's Rate Sheet.
Different interest rates have different costs. Higher rates are less expensive than lower rates because the lender is going to earn more in interest over the life of the loan, so it makes sense to charge less. For the same reason, they charge more for a lower interest rate, because the lender will earn less interest over the long term.
Before quoting a mortgage rate to the applicant the mortgage broker or banker will add to the rate the amount that he wants to make off of the mortgage.
Why Mortgage Rates Fluctuate
Mortgage rates change for the same reasons that all interest rates change. It is important to realize that there is never just one interest rate. there are always multiple rates.
The interest rates include Prime rates, Treasury Bill rates, Treasury Bonds, Treasury Notes, Federal Funds Rate, Federal Discount Rate, Certificate of Deposit (CD) Rates, Fannie Mae funded Security rates, Ginnie Mae funded Security rates and the 11th District Cost of Funds - which is determined by obtaining an average of all of the other rates.
Like most prices in a democratic society, mortgage rates, and all other interest rates, are based on the basic concept of supply and demand. If the demand for mortgages is high, the mortgage interest rate will go up. When the demand for mortgages goes down, so does the mortgage interest rate.
This means that bad news for the overall economy (high unemployment, recession) is good news for the interest rate (lower mortgage rates).
This is also true the other way around. Good news (a strong economy) is bad news for the interest rate (higher mortgage rates).
