How Are Mortgage Rates Set?

mortgage rates trends

By Claudette Pendleton

Mortgage Lenders and the Secondary Market

Mortgage lenders may control who gets approved for a mortgage loan. However, they do not control the interest rate given to the homebuyer for the loan. Lenders have very little to do or say about the rate charged for a home loan. Large banking conglomerates like Wells Fargo and Bank of America also have to submit to a higher power that governs mortgage rate control--that power is the secondary market.

Fannie Mae, Freddie Mac and Other Mortgage Investors

The secondary market involves agencies such as Fannie Mae, Freddie Mac and various other mortgage investors. These organizations were started with the help of the federal government many years ago. The purpose of establishing these agencies is to help the process of mortgage lending to be more effective and resourceful. Fannie Mae and Freddie Mac are two very huge and prominent mortgage investors. They and the various other large investors purchase loans that lenders have made. After purchasing these loans, they either hold them in their portfolios or bundle the loans together establishing mortgage-backed securities that are then sold to Wall Street, mutual funds and other investors. Wall Street and the other financial investors then trade the mortgage-backed securities in comparison to how Treasury securities and bonds are traded.

Consequently, it's not the mortgage lenders, but investors who possess the power to control mortgage rates. And just as interest rates go up and down in the stock market, when financial news proposes that the economy is doing very well and looking good, investors demand higher yields, resulting in lenders being forced into raising mortgage rates.

When financial news proposes that the economy is on a downward spiral, consumer interest rates will drop because the federal government will typically have to cut rates in order to get the economy back on track.

Watch for Financial Trends

Interest rates shift in phases. Generally, after an extended rise in interest rates, there is a slow drop in rates. There are some who monitor 10-year Treasury bonds as a indicator as to how the rates will be. They understand that when bonds go up, interest rates go down--and, when this happens, interest rates will go up.

In order to receive the best achievable mortgage rate, it is vital that consumers watch for the financial trends and signs that indicate changes in the interest rates. Pay close attention to financial news before purchasing a home.


mortgage rates trends