Rate quotes from lenders often seem to be all over the place, constantly changing and hardly ever match what you see advertised. Big question is why? With this article I'll explain the factors that affect your rate, the rate shopping questions to get answered, and what to watch out for.
There are 3 main factors that determine the interest rate you receive- the economy (economic factors that affect rate movement), the mortgage lender you choose and their pricing philosophy, and finally, you and your transaction criteria.
The economy and how it affects mortgage rates
The strength of the U.S. economy, and investor confidence, determine whether we’re in an overall ‘high-rate’ or ‘low-rate’ environment at any given time. Here’s how it works.
Mortgage-backed securities (MBS) set the tone for mortgage rates
The first thing to recognize is that most mortgages are owned by lenders for only a brief period.
Soon after closing, they’re typically bundled up with a pile of other mortgages and sold at a profit on the secondary market to investors. Thus a lender has more money to lend to the next borrower.
Each bundle is called a mortgage-backed security (MBS). An MBS is a type of bond: a fixed-income financial instrument that investors all over the world can purchase.
How the MBS market affects rates -Supply and Demand
Lenders constantly monitor the secondary market where MBS are traded. On many days, MBS prices can move hundreds of times. If those movements are large, lenders can change their rates multiple times a day as they adjust to the market. When demand for (and thus the price of) MBS goes up, mortgage rates typically go down. This often happens when the economy is uncertain or on a downward trend. Investors always want safety — and MBS are generally a safe investment. So more money will flood into the mortgage market, causing borrowers’ rates to fall.
The Fed’s role in determining mortgage rates
The Fed indirectly takes part in setting mortgage rates. When it adjusts its own rate- called the discount rate (this is the rate banks can borrow money from the Fed), that can influence --but doesn’t directly mirror home loan rates. Fed rate movement can change the mood of investors in the MBS secondary market and often when the Fed increases the discount rate you will see increases in mortgage rates.
Watch the news if you’re rate shopping - inflation, inflation, inflation
When the economy is booming and inflation rising is talked about a lot, mortgage rates have pressure to increase. When you hear of economic trouble and inflation falling, rate pressure is downward. And that can apply on a daily basis. An unexpectedly great economic report can push mortgage rates higher, while one that’s worse than expected can push them downward. That’s why it’s important to keep an eye on the news when you’re shopping for mortgage rates. They could drop --or take off --at any time, and you want to be ready to lock when the time is right.