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How Are Home Loan Mortgage Rates Determined?

Interest rates for a home loan are a primary concern when buying a home. A lower interest rate makes for a lower mortgage payment while higher rates can make it more challenging to find an affordable monthly payment or to even get approved for a home loan.

But how are interest rates determined for a mortgage and what can you do to make you get the lowest possible rate. Here is an explanation of how mortgage rates are determined.


How Mortgage Interest Rates Are Determined

Several factors help you qualify for a home loan. Lenders look at your qualifying factors to determine your risk level. The better the qualifying factors, the better the interest rate you will receive.  Here’s how the rates are determined.

Mortgage rates are not just affected by the economy and how well the economy is doing but by what are called mortgage backed securities.  So what are mortgage backed securities?

A mortgage-backed security (MBS) is an investment that is secured by a collection of mortgages bought by the banks that issued them. Mortgage-backed securities are bought and sold on the secondary market

The secondary mortgage market for mortgage loans is a financial marketplace where investors purchase and see bundled packages comprised of many individual loans called mortgage backed securities. 

Most mortgage-backed securities are issued by Fannie MaeFreddie Mac and Ginnie Mae. These are government-sponsored enterprises that buy mortgage loans. These companies were designed to make homeownership easier and more accessible to consumers.

Although they’re private companies and not technically government enterprises, Fannie Mae, Freddie Mac and Ginnie Mae still set guidelines that banks and lenders must follow.

Lenders typically set their rates based on the return they need to make a profit after accounting for risks and costs.

How are Mortgage Rates Set?

A mortgage loan is a debt, and for context, lenders look to another type of debt: bonds. “When investors buy bonds, they are lending money in exchange for periodic interest payments and a return of their principal when the bond matures, 

The annual rate of return on a bond provides investors, based on its price and interest rate, is known as the yield. Mortgage rates are heavily influenced by these [bond] yields. The type of bonds that lenders are focused on are what are called mortgage backed securities.  Rates of these securities are closely tied to the 10 year US Treasury.  

Mortgage backed securities typically trade at a premium and the difference between the treasury and the mortgage backed security rates is called the mortgage spread.  Lenders add a margin to the MBS rate to come up with the rate they charge for a home mortgage loan. Companies like that work on slimmer margins are able to offer lower rates.

Frequency Of Interest Rate Changes

Every day, banks receive rate sheets. This doesn’t mean rates change daily, but they can. In fact, they can change multiple times a day. If you have your eye on an interest rate, it’s best to talk to your mortgage lender about current rates and locking a rate early in the mortgage process, before it rises.

15-Year Vs. 30-Year Mortgage Rates

If you can afford a shorter term or 15 year mortgage with its higher payment, you’ll get a lower interest rate and save a lot of money in total interest paid on your loan. Additionally, if mortgage lenders can receive their money back in half the time (15 years), they’ll reward borrowers for it with lower interest rates.

Types of Home Loans:

FHA Loans – From 3.5% Down. Grants for 3.5% Available offering 100% financing for qualified borrowers.

HomeReady 3% Down
Conventional Loans – From 5% Down
Jumbo Loans – From 15% Down
Statement Only Loans for business owners from 15% Down
P&L Only -Almost a no doc loan for business owners buying a primary residence
VA Loan -No money down home loan for military personnel.



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