Interest Rates | Hawaii VA Loans

What Determines Mortgage Rates?

This is an age old question and actually quite complicated one (ok, maybe not quite age old, but common questions nonetheless). However, I will do my best to answer it as simply and accurately as possible. This is a slight oversimplification and this explanation may not apply to all mortgage rates, but it is the driving force behind the majority of rates (there are some lenders who set rates completely at their choosing, i.e credit unions, but they often base their rates off of other lenders’ rates which are described here). So, here it goes…

Mortgage rates, like stock prices are set by the open market. What does that mean? Well, it means that there isn’t someone sitting in a back room in Washington telling people what the rates are going to be. There are thousands of investors (mostly large banks, insurance companies and others) that buy and sell mortgage ‘securities’ every second the market is open. Whenever two agree on a price, that is the new market price. So…what are these securities? Lenders across the country sell individual loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, in turn give them back a security equal to the amount of loans sold to them. They also provide a guaranty that the principal (or the face value) of the security will be repaid. Because of this guaranty from Fannie Mae or Freddie Mac, investors are willing to buy these securities because they are now considered a safe investment. The buyer of the security does not need to worry if Joe in Detroit loses his job at the auto plant. Fannie and Freddie do that worrying for them and absorb any losses (I may describe that process in another blog post, but you’ve got enough to absorb within this one).

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Posted by Jim Owens. Filed in Interest Rates, Points, Tips