How Your Mortgage Rates Are Determined

Whether it is your first time buying a home or you are searching for the best mortgage rates, it is important to understand how your mortgage rates are determined. You may think your mortgage interest rates are set by the lender, but it’s actually set by market forces beyond the lender’s control.

And contrary to popular belief, mortgage rates are also not based on the 10-year Treasury note, which is a debt obligation issued by the US government with a maturity of 10 years upon initial issuance. Mortgage rates are not based on this metric, rather, they are based on mortgage bonds.

In this article, we’ll review the secondary market– where mortgages are bought and sold –and when the rates tend to rise and fall.

Fannie Mae & Freddie Mac

Fannie Mae, or the Federal National Mortgage Association, is a US government-sponsored enterprise and publicly-traded company. This financial institution was founded in 1938 as part of the New Deal to help the mortgage market by reducing the American strain on locally based savings and loans associations.

Fannie Mae’s brother organization is called Freddie Mac– the Federal Home Loan Mortgage Corporation. It was created in 1970 to expand the secondary for mortgages in the US, and its purpose is to buy and pool mortgages on the secondary market to sell as mortgage-backed security to investors on the open market. This secondary market increases the available money supply for mortgage lending as well as the money available for new home purchases.

In short: Fannie and Freddie keep the money flowing through the mortgage finance system. So when you get a mortgage, Fannie and Freddie will sell the loan on the secondary market. The benefit to these huge institutions? They get their money back quickly so they can loan it again to other mortgage borrowers.

The Secondary Market & Who Determines Your Rates

The secondary market is crucial to the lending market because, without it, mortgage lenders would have their money tied up in loans that are being gradually repaid over the years. That means they’d have less money to loan out overall, and far more reluctant to lend to you. But thanks to the secondary market, the lender gets the money back immediately at a profit when they sell your mortgage.

These investors in the secondary market are who collectively determine the interest rate of your loan. Lenders offer you an interest rate that investors on the secondary market are willing to purchase. Remember– these investors buy securities because they want stable payments over a long period of time.

The Factors that Affect Rates on the Secondary Market

Like the primary market– where these securities are created in the forms of new stocks and bonds –the secondary market is affected by the health of the US economy.

Mortgage rates have a tendency to rise when:

  • US stocks rise
  • Unemployment rates drop
  • Inflation is expected to accelerate
  • Foreign markets rise

Mortgage rates have a tendency to fall when:

  • US stocks tank
  • Unemployment rates rise
  • Inflation is expected to slow
  • Foreign markets fall

In short: as stock and markets fluctuate, so do prices and yields on the secondary market. A good economy means higher mortgage rates because investors demand better yields from mortgage bonds. A dwindling economy tends to mean lower mortgage rates for consumers.

Pick the Right Home Loan Company

In actuality, the factors controlling mortgage loan rates are fairly complex, and it can be difficult for most homebuyers to understand the secondary market on their own. That’s why it’s best to enlist the help of a home loan company that has extensive knowledge and experience with industry leaders such as Fannie Mae and Freddie Mac. CIS Home Loans has been a Seller/Servicer for Fannie Mae and Freddie Mac since our opening in 1991.

Contact CIS Home Loans to turn your dream house into your new home while being confident you’re paying the best mortgage rates.