{"id":659,"date":"2010-03-28T11:33:45","date_gmt":"2010-03-28T17:33:45","guid":{"rendered":"http:\/\/template.lenderama.com\/?p=659"},"modified":"2010-03-28T11:33:45","modified_gmt":"2010-03-28T17:33:45","slug":"how-are-mortgage-rates-determined","status":"publish","type":"post","link":"https:\/\/dev203k.orbitwebx.com\/dev203k\/how-are-mortgage-rates-determined\/","title":{"rendered":"How Are Mortgage Rates Determined?"},"content":{"rendered":"

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How Are Mortgage Rates Determined?<\/em><\/p>\n

Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market<\/a>.<\/p>\n

The secondary market is comprised of investors<\/a> who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors.<\/p>\n

When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.<\/p>\n

That market price of those Mortgage Backed Securities (MBS<\/a>) is what impacts mortgage rates.<\/p><\/blockquote>\n

Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.<\/p>\n

This perception of safety is due to the implied government backing of Fannie Mae <\/a>and Freddie Mac and the fact that the Mortgage Backed investments are based on real estate collateral.<\/p>\n

So, if the loan defaults there is real property pledged against potential losses<\/a>.<\/p>\n

In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs real property.\u00a0 The movement between the two investment vehicles often dictates mortgage rates.<\/p>\n

Why Do Mortgage Rates Change?<\/strong><\/h2>\n

Mortgage rates fluctuate based on the market\u2019s perception of the economy.<\/p>\n

Stocks are considered riskier investments, and therefore have an expected higher rate of return to compensate for that risk.<\/p>\n

When the economy is thriving, it is presumed that companies will perform better, and therefore their stock prices will move higher.<\/p>\n

When stock prices move higher – MBS prices generally move lower.\u00a0 Mortgage Backed Securities, however, thrive when the economy is perceived as not doing well.<\/p>\n

When investors forecast a faltering economy, they worry that the return on stocks will be lower, so they frequently engage in a \u2018flight to safety\u2019 and buy more secure investments such as Mortgage Backed Securities.\u00a0 Mortgage rates are actually based on the yield of those Mortgage Backed Securities.<\/p>\n

Bonds are sold at a particular price based on their value in relation to other available investments.\u00a0 When a bond is sold it yields a certain return based on that original purchase price.\u00a0 As the prices of the MBS increases because investors seek their safety, the yield decreases.<\/p>\n

Conversely, when investors seek the higher returns of stocks and the MBS are purchased in lesser quantities the price goes down.\u00a0 The lower price results in a higher yield, and this yield is what determines mortgage rates.<\/p>\n

How Would I Know if Rates are Expected to Go Up or Down?<\/strong><\/h2>\n

UP: <\/strong><\/p>\n

When the economy is growing or is expected to grow, stocks will likely become the more favored investment.<\/p>\n

When investors buy more stocks, they purchase fewer MBS, which drives the price down.<\/p>\n

When the price of the MBS is lower, the yield increases.<\/p>\n

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to increase<\/strong> in this environment.<\/p><\/blockquote>\n

DOWN<\/strong>:<\/p>\n

When the economy appears to be slowing or is doing poorly, investors typically move their money out of the stock market and into the safety of the MBS.<\/p>\n

This drives the price of these investments higher, which results in a lower yield.<\/p>\n

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to decrease in this environment.<\/p><\/blockquote>\n

…..<\/p>\n

Since these market variables and expectations change multiple times as economic reports are released throughout the course of a week, it is not uncommon to see mortgage rates change several times a day.<\/p>\n

Understanding how rates move is not necessarily as important as having a loan officer that is equipped with the technology and professional services to track and stay alerted at the precise moment rates make a move for the better or worse.<\/p>\n

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Related Mortgage Rate Articles:<\/strong><\/h2>\n