How Are Mortgage Rates Set?

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Many factors affect mortgage rates. So it pays to understand how mortgage rates are set. Most folks think lenders set rates each day. Well, this is partially true.

 

Actual mortgage rates are largely determined by the secondary market, where mortgages are bought and sold. Fannie Mae and Freddie Mac are two government agencies who's job it is to keep the mortgage secondary market stable. They set prices each day as determined by the secondary market. They offer a guaranteed price to buy a certain type of mortgage.

 

They change each day based on the market. Mortgage rates most closely follow the 10 Year Treasury Bond, but this is not an exact science. This is only used as a benchmark. As bond prices go down, the yield (the rate) goes up. Mortgage rates in the secondary market must then also rise, or all investors would put their money in the bond market, as opposed to mortgages.

 

As with the stock market, interest rates tend to move up and down. When the economy is strong, rates are higher. When the economy is slower, rates drop.

 

Rates generally change daily. In fact, rates can change during the day as market conditions change. Normally rates are priced in 1/8th of a point increments, or .125%. Your lender may make the decision to keep their rates more stable than market changes - they may choose to earn business by keeping rates a bit below market, or above market if they are greedy.

 

Generally, all mortgage lenders have access to the same rates. When you shop rates, make sure you compare rates on the same day, at the same time, on the same program, with the same points. Otherwise, you could end up with a rate lower than you could have earned.

 

Keep in mind your rate is 'floating' until you decide to lock it. Once you lock your rate, your lender will provide you with a disclosure showing your rate is locked. At that point, the lender is reserving that money for you and keeping your rate locked in. You are protected if rates go up.