There are several different factors affecting mortgage rates and what rates lenders offer you when you apply for a home loan. In general, rates tend to decline during periods of economic slowdowns and increase during periods of economic growth and strong consumer confidence.
The Secondary Market and Mortgage Rates
Aside from the economy, the secondary mortgage market is another factor that does influence mortgage rates. It is important to note the secondary mortgage market IS NOT the same thing as a second mortgage. People do tend to get these confused. A second mortgage is a second loan taken out against your home, whereas the secondary mortgage market is where home loans are bought and sold by major financial institutions.
These financial institutions purchase mortgages from lenders and then repackage them into financial securities, often with the same interest rates. For instance, Fannie Mae purchases ten mortgages from different lenders, all with a 3.43% rate, and then sells all ten in one lump package to an investor.
In return, Fannie Mae would get paid back all the money for the securities packages. Then Fannie Mae would have more money to purchase more mortgages from lenders. This process is what, essentially, allows lenders to have the money available to underwrite new mortgages. Without the secondary mortgage market, lenders would not be able to lend money to as many home buyers.
The 10 Year Treasury Yield and Mortgage Rates
Directly related to the security investments offered with packaged mortgages, the 10-year treasury yields helps drive mortgage rates. While most mortgages are typically underwritten for 30 years, the vast mortgage of all mortgages is either paid off or refinanced in 10 years. This is why the 10-year treasury yield is used as a measure to gauge whether mortgage rates will go up or down.
The thing with treasury investments is that they offer greater financial security compared to packaged mortgages. The U.S. government does provide a 100 percent backing on treasuries, while mortgage securities are riskier. As such, mortgage rates are often reflective of the higher risk required by investors and tend to be priced to provide higher compensation to offset the risk.
Normally, treasury yield rates and mortgage rates will move similarly in the same direction. If yield rates increase, then it is an indication mortgage rates will also be increasing. On the other hand, if yields go down, then mortgage rates tend to also decline.
Other financial market factors also play a role, so, just because treasury yield rates go up or down, it does not always guarantee mortgage rates will follow suit. Yet, when treasury rates go up, mortgage rates tend to go up just as quickly—sometimes faster—although, when rates go down, mortgage rates drop much more slowly and can take longer to decline.
What Else Moves Mortgage Rates?
Other economic factors that help drive mortgage rates are directly related to how the economy is performing, such as:
- Stock Market Prices – If prices on the stock market are going up, it means investors have confidence in the economy, so mortgage rates go up, too.
- Inflation – During increasing periods of inflation, mortgage rates tend to increase and decline when inflation decreases or remains steady for long periods.
- Federal Reserve Reports – If the Federal Reserve raises interest rates, it causes a trickle-down effect and interest rates on all lending products increase, including mortgages. If they lower rates, then rates on all lending products tend to also decline.
- Home Sales – The number of home sales, including new construction, does influence mortgage rates. When home sales are increasing, rates tend to go up, and they decline when sales are decreasing.
How You Affect Mortgage Rates
The rate offered on a home loan by your Chicago mortgage broker is a combination of the above financial factors, along with factors driven by you. These “personal” factors are largely based on the risks associated with underwriting a home loan and include:
- Credit History/Credit Score
- Mortgage Points
- Down Payment Amount
- Loan Type
- Loan Term
- Type of Interest Rate
Mortgage rates are updated regularly and are based on national averages. Your rate will vary, depending on your personal factors, economic factors, and loan programs. To find out what rates you could be offered on different home loan products, please feel free to call A and N Mortgage at (773) 305-LOAN (773-305-5626) to speak with one of our mortgage brokers today!
FAQs
Mortgage rates are affected by market factors like inflation, the cost of borrowing, bond yields and risk.
How are mortgage rates determined? ›
Mortgage rates are determined by individual factors like your credit scores, loan type and location, but they shift more dramatically because of broader factors like economic and market conditions.
What are mortgage interest rates influenced by? ›
The Federal Reserve, bond market, Secured Overnight Finance Rate, Constant Maturity Treasury and the health of the economy and inflation all affect mortgage rates.
What are the main factors that determine the interest rates? ›
Factors that affect interest rates are economic strength, inflation, government policy, supply and demand, credit risk, and loan period. There are two standard terms when discussing interest rates. The APR is the interest you will be charged when you borrow. The APY is the interest you get when you save.
What factors do lenders consider when determining my interest rate? ›
Lenders consider your credit score, payment history and the current economic conditions when determining interest rates. Generally speaking, the higher your credit score, the less you can expect to pay in interest.
What is the interest rate and how it is determined? ›
In economic theory, interest is the price paid for inducing those with money to save it rather than spend it, and to invest in long-term assets rather than hold cash. Rates reflect the interaction between the supply of savings and the demand for capital; or between the demand for and the supply of money.
How do banks determine interest rates? ›
Retail banks set interest rates based on how risky they think it is to lend someone money. A customer with a good credit score usually receives a lower interest rate because they are seen as a lower risk. A customer with a lower credit score, on the other hand, is considered at greater risk of default.
What factors change mortgage rates? ›
They are:
- Your credit score.
- Your home's location.
- The home price and loan amount.
- Your down payment.
- The type of loan and its length.
- Whether it's a fixed- or adjustable-rate mortgage.
Interest rate levels are a factor in the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them.
What are mortgage interest rates linked to? ›
The interest rate will differ due to various factors, for example:
- Amount borrowed.
- Deposit amount.
- Type of mortgage.
- Lender offers or deals.
5 strategies to get the lowest mortgage rates in 2024
- Buying discount points. Almost half (45%) of home buyers with conventional loans in 2022 purchased discount points to lower their interest, according to Zillow research. ...
- An interest rate buydown. ...
- An adjustable-rate mortgage. ...
- A shorter-term mortgage. ...
- An assumable mortgage.
4. Down payment. In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it—you'll usually get a lower interest rate.
Why are mortgage rates so high? ›
When inflation is running high, the Fed raises those short-term rates to slow the economy and reduce pressure on prices. But higher interest rates make it more expensive for banks to borrow, so they raise their rates on consumer loans, including mortgages, to compensate.
What decides mortgage rates? ›
Mortgage rates are affected by a variety of economic factors. These include bond market fluctuations, changes to the federal funds rate and the wider housing market. Your mortgage's interest rate will also be impacted by your own financial situation, such as your credit score, down payment amount, and outstanding debt.
How is the mortgage rate calculated? ›
The economic climate and interest rates set by the Federal Reserve impact mortgage rates, as do other things. From there, lenders will calculate your interest rate based on your financial situation, including your credit score, any other debts you have, and your likelihood of defaulting on a loan.
Why do mortgage rates vary by lender? ›
The lender's overhead cost structure is a big factor in determining why mortgage rates differ by lender. Lenders who contain costs and keep their overhead low have the ability to offer better rates and/or closing costs. Overhead costs can include the following: Marketing cost.
How much interest is paid on a 30-year mortgage? ›
30-Year Fixed Mortgage vs. 15-Year Fixed Mortgage
| 30-year fixed | 15-year fixed |
|---|
| Interest Rate | 3.78% | 3.08% |
| Monthly Payment | $1,035 | $1,072 |
| Total Interest Paid | $107,736 | $29.998 |
| Total Payment | $372,736 | $193,123 |
2 more rowsFixed-rate mortgages keep the same interest rate throughout the term; with adjustable-rate mortgages, interest rate changes over time can make monthly payments go up or down.
Does down payment affect interest rates? ›
Down payment
In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it—you'll usually get a lower interest rate.
Is 5.99 a good mortgage rate? ›
In today's market, a good mortgage interest rate can fall in the high-6% range, depending on several factors, such as the type of mortgage, loan term, and individual financial circ*mstances. To understand what a favorable mortgage rate looks like for you, get quotes from a few different lenders and compare them.
