Understanding the Mortgage Rates
A Home Buying Article Contributed by Elizabeth Fox-Wise
There is Never One Mortgage Interest Rate
I have heard many lending institutions say that the most common question they receive is "what is today's mortgage rate? ". The irony is that there is no real answer to that question. There is always several mortgage rates available at any given time.
The mortgage rate being offered will vary slightly from lender to lender and among different mortgage types and terms. And a lending institution may even vary the rate that they offer from person to person. It is possible for two people to approach the same lending institution requesting the exact same mortgage and be offered two very different mortgage rates.
This is because the lender will typically offer prime rate to his best customers
What is Prime Mortgage Rate?
This term is actually known as WSJ Prime Rate. The WSJ stands for the Wall Street Journal. The Wall Street Journal conducts surveys of the top thirty largest US Banks and then publishes the average prime rate. The WSJ is the most widely used measure of prime rate. Prime Rate is basically the interest rate at which the largest banks are willing to lend money to their favorite customers.
The prime rate is used by lending institutions to set rates for their other customers on mortgages, other loans, and credit cards. When you see that the Prime Rate has gone up, an adjustable rate mortgage just might follow with the same increase. You sometimes will see lenders advertising mortgages and other loans and offering rates such as prime plus two. This means you can lock in for a rate at Prime plus two percent. For example, if Prime is 4.6%, this lender would give you the loan at 6.6%.
The Lender Only Has So Much Say in the Mortgage Rate
The mortgage rate being offered by a lender is not really being determined by him. He is adding his profit to the rate being demanded by the investor.
Decades ago, the US Government provided help to mortgage investors in an attempt to make the mortgage lending process run smoother. Today, thee are a handful of major mortgage investor companies which hold the majority of the mortgages in the country. These investors will buy mortgages from lending institutions.
As a result of the strong hold that the mortgage investor has on the market, it is the investor that has the power to determine the mortgage rates.
When the economy is strong and increasing, investors will demand higher interest rates from the lender, who, of course must pass these on to customers as higher mortgage rates. This is because the investor is anticipating a Federal Reserve Board rate hike, intended to slow the economy down.
On the opposite side, if the economic outlook is bleak, Investors will typically start clamoring for bonds because they are anticipating that the Fed will lower rates to spur the economy. Since investor demand is high, the lending institutions can offer lower mortgage rates.
The mortgage seeker must pay attention to economic news in order to get the best mortgage rate.
