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!