Despite popular belief, mortgage rates are not controlled by the Federal Reserve. Neither are mortgage rates set by the lender. So what drives mortgage rates? When you are given a mortgage by a lender, it is bought by agencies that comprise something called the secondary market. It is this secondary market that plays a large role in deciding mortgage rates. Other important factors include the housing market and the investor market.
The Secondary Market
The secondary market, huge agencies founded with government help long ago, is part of what drives mortgage rates. When they buy mortgages from lenders, they collect them and sometimes create bundles from them, then sell them to numerous places that use them much the same as bonds.
The Housing Market
The housing market is another part of what drives mortgage rates. There are three main factors in the housing market. First, there is the land that is developed into new housing. Second, there are people that sell their houses for various reasons. Third, and perhaps most important, there are the people who buy these new or used homes.
The Investor Market
The third main factor in what drives mortgage rates is the investor market. The secondary market buys mortgages from the lenders and makes securities out of them. In turn, investors buy these securities. It is these investors that make up the investor market. Investors seek the highest yield, and have other options including stocks and bonds. When stocks and bonds fall, since mortgage securities are an alternative, mortgage rates also fall. When stocks and bonds rise, mortgage rates must also rise to compete. Investors are also looking for security, and when mortgage rates don’t offer the best security, their rates must be much higher to remain competitive.
*Affects pricing. With the No Closing Cost
Option, borrowers finance the closing costs instead of paying for them at
closing. Borrowers who pay closing costs at closing may qualify for a lower
interest rate. Some upfront fees (ex. credit report and appraisal) may apply
and may be credited at closing.
*Refinancing or taking out a home equity loan or line of credit may increase
the total number of monthly payments and the total amount paid when compared to
your current situation.
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