Where Do Mortgage Rates Come From, Anyway?
Where Do Mortgage Rates Come From, Anyway?
One might wonder where mortgage rates come from and who makes these daily adjustments. There is indeed a method. Lenders don’t set rates pretty much out of thin air. You also might wonder why mortgage lenders from A to Z offer interest rates that look very much the same if not exactly the same. Do they have a Zoom meeting and they all decide at once?
First, an individual lender can set interest rates based on several factors. Rates for a rental property will be slightly higher compared to an owner-occupied home. Rates for shorter-term loans can be lower compared to a longer-term loan. Rates might even adjust based on the amount of down payment or equity in the property. Credit scores can also be a factor. Pretty much all lenders follow these guidelines.
Okay, so then why are rates pretty much the same wherever you go, with only slight variances? Because they all refer to the very same index when setting rates.
No, they’re not based upon Treasury bonds or bills, although that’s a common misconception. Close, though. Fixed-rate loans refer to a similar bond. Instead, lenders look up the price of a specific Mortgage Backed Security, or MBS. An MBS is indeed a bond that offers a fixed rate of return and just like any other bond, when the price of the bond goes up, the yield (return) goes down.
Generally speaking, when investors choose between a stock or a bond, while a particular stock might provide a greater return, a bond offers security. The investor knows how much it will receive and when. Historically, when the economy is doing quite well, investors pull money out of bonds and into the stock market. Lower demand for bonds means a lower price for the bond. With mortgage-backed securities, the method works pretty much the same.
Another bug-a-boo for higher mortgage rates is the rate of inflation. Higher inflation will typically result in higher rates as the Fed looks for ways to cool down an overheated economy. Or, as is currently, various increases in commodities and everyday consumer goods can rise as well. This is the current cycle we see ourselves in. And while the Fed stood pat at their last round of meetings, they indicated they’ll be ready the next time around. Another rate bump by the Fed may be already cooked in the books. We’ll see. But the gambling money is on one more Fed increase at their next round of meetings in a few weeks.
If you're interested in checking out the new lower interest rates we have a local lender we can refer you too. Call or text me at 540-537-9281.
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