mortgage financing and programs

How Mortgage Rates Are Set

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Contrary to popular myth mortgage rates do not arbitrarily rise and fall. There is no agency or consortium that has control to set mortgage rates. Mortgage rates are determined by numerous economic factors. Supply and demand, competition for investment money, inflation, the overall health of the economy, are all factors that can push mortgage rates up or down. Most mortgage money comes from investors purchasing debt securities, otherwise known as bonds. There are many different types of bonds for selling many different types of debt. Mortgage debt is just one of those types of bonds. Sellers of all type of bonds are in competition with one another for investor money. When demand for these mortgage bonds fall a change must be made to make them more attractive to investors. Usually this means raising interest rates. Generally as bond prices rise interest rates fall. That is why the tracking of certain bond prices are good indicators to determine if mortgage rates will rise or fall. The 10-Year Treasury bond has historically been the best indicator for mortgage rates because the average mortgage is paid off or refinanced within 10 years. This is an oversimplification because the mortgage market has two clients: Investors who want the highest possible return on their investment and typically prefer higher interest rates, and home buyers who want to obtain the lowest interest rates possible. Rates need to be high enough to attract investors but low enough to attract borrowers.

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