What Shapes Morgage Rates

Understanding morgage rates can seem almost impossible. Once you feel you have it figured out things can change. It is a process that is not as standardized as you think. In fact, every lender can set their own morgage rates, so that just complicates things. There is a lot of misunderstanding when it comes to rates and how they are figured.

The Federal Reserve

You probably often hear about the Federal Reserve and interest rates. Most people think that the rates are based completely off the Federal Reserve rate and that, basically, the Federal Reserve sets morgage rates. This is not true.

The rates from the Federal Reserve and the rates offered by lenders are linked, but they are not the same. The Fed’s rates do not dictate what the rate is that your lender will offer to you. The truth is that lenders set their rates based upon various factors.

Supply and Demand Factors

There are three supply and demand factors that affect morgage rates:

The housing market
The secondary market
The investor market

The housing market includes people buying homes, selling homes and building homes. When the housing market is strong demand for loans rise and that can raise interest rates.

The secondary market is the market that handles morgage loans sold off by primary lenders. The impact on rates depends in part on what is going on in secondary lending.

The investor market comes into play when the secondary lenders convert loans into securities that are then invested in. These securities are called morgage-backed securities. If the equity market is strong then this creates competition and this prompts a rise in morgage rates.

The Federal Reserve rates come into play here with the investor market. When the Fed announces they are going to lower rates, investors start buying up securities at the higher rates which provide more of return for them. Demand goes up and lenders can lower rates.

Other Factors

The markets are only a part of what shapes morgage rates, though. If you look at this current economy you can see that in bad times everything seems to become very unstable. Lenders are more cautious. They are not willing to lend like they did in the past during stable economic times. This causes many changes in rates throughout the industry.

There are so many things that shape morgage rates that it can be very confusing to try to figure them all out. You may never understand why your lender offered you one rate and then offered someone else a better rate. Rates can vary from lender to lender and can be dependent upon your situation, too. Figuring how a rate was decided may be something that you can never do with accuracy.

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Morgage Rates

morgage interest rates

What Shapes Morgage Rates

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