November 9th, 2019 10:23 AM by Jackie A. Graves, President
When you’re shopping around for a loan,
the interest rate you’re given is one your most important considerations. After
all, it has a big impact on how much you’ll be expected to pay each month. You
probably know that it’s in your best interest to get a loan while mortgage
interest rates are low, but have you ever wondered how these rates work?
If so, keep reading. In the post below, I’ll cover how mortgage
interest rates are determined, as well as why each person can receive a
How mortgage interest rates are
Believe it or not, once your lender gives you your mortgage,
they don’t keep your debt in-house. If they did, they’d have to wait a long
time for their investment to pay off. Instead, they sell your debt to
third-parties known as mortgage
The aggregators - like Fannie Mae and Freddie Mac - then take
your mortgage debt, bundle it with other debts, and repackage it into what’s
known as mortgage-backed
Those mortgage-backed securities are then broken down into
shares, which are sold to individual investors, who hope for a return on their
In this case, mortgage interest rates are determined by two
things: the price at which your debt is sold to the aggregators and the price
at which the investors are willing to buy their shares. It’s a
supply-and-demand scenario that’s affected by a mix of economic factors.
The economic factors
Multiple economic factors go into the prices at which
mortgage-backed securities are bought and sold. One important one is the Federal
funds rate, or the rate at which banks are allowed to borrow money. In weak
economies the Fed lowers this rate to encourage people to keep borrowing. In
strong economies, the Fed raises the rate to stave off inflation. For their
part, the lender must charge enough to cover the cost of borrowing the money.
The rate of inflation also plays a role.
Inflation is the phenomenon which occurs when the price of goods and services
rise across the board. Inflation poses a problem for investors because it means
that the money people borrow now will be worth less when they pay it back and
when the investors see their returns. When a rise in inflation is predicted,
investors are less eager to buy into mortgage-backed securities because their
returns will be lower.
How you’re given your interest rate
All of those factors listed above play into what interest rates
are available on the market. But the truth is the rate you’re given could be
Again, the rate you’re given is going to be based on multiple
factors. They may include:
In general, the bigger the risk the lender sees in approving you
for a mortgage, the higher your interest rate will be. However, keep in mind,
different lenders may offer you different rates, which is why it’s important to
shop around for a loan.
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