A Little Insight Into What Causes Mortgage Rates to Change?
By Jim Pate
One of the most common questions I am asked by consumers and Realtors is, “What is the rate today?” Well, that is not an easy question to answer since mortgage rates are constantly shifting due to a variety of factors.
There are factors, which are associated with the borrower, the property, the lender and the loan program, which they have chosen. There are also outside or market factors, over which the lender nor the borrower has any control, but which may affect the mortgage interest rates.
Let’s focus on those outside forces, first.
We often will hear reporters and commentators discussing the mood of the Fed (The Federal Reserve) or watch as they wring their hands over the Fed’s pending decision to raise or lower interest rates. The Fed influences monetary policies by controlling the interest of the federal funds rate, which is the interest rate, that banks charge each other for short-term loans. However, the ripple effect of the Fed’s actions typically moves interest rates on all consumer and business loans.
Mortgage Backed Securities
This may come as a surprise to you, but your lender doesn’t hold your loan on a shelf in their office. In fact, the company, which services of your loan, doesn’t actually hold your loan, either. Mortgage loans are packaged into large pools and sold as Mortgage Backed Securities. This is called the secondary (mortgage) market. If inflation occurs, the dollar loses buying power and interest rates are boosted to slow the economy. Lenders pass that cost onto borrowers.
It’s the Economy …
As the economy (inflation/deflation) affects interest rates, the opposite is also true. When interest rates go up, home values come down, businesses downsize and American’s tighten their wallet. Jobs reports, unemployment, consumer price index, etc. are all economic indicators, which play a role in mortgage rates.
Political unrest, terrorist attacks, increased foreign competition, trade deficits, fuel costs, etc. all may have an effect on the cost of money. Interest rates are tied to the ‘fear factor.’ The higher the uncertainty is for investors, the higher the interest rates.
The Most Important Market Factor
Mortgage interest rates are tied to the 10-Year Treasury Note because it is a great indicator of investor confidence. Even the Fed watches the 10-Year Treasury Yield prior to making a decision on rate changes. The 10-Year Treasury Note is a loan, which investors make to the US Government. It is considered a very safe investment since the government is not likely to default. Although it is safe, it hit a 200 year low in mid-2016 but rebounded after the election.
Let’s Bring it Closer to Home
Now that we have covered the outside factors, which affect mortgage interest rates, let’s explore the factors, which we control.
Before the 1990s, underwriters used what we called common sense underwriting, which essentially meant that they looked at each borrower individually and made an underwriting decision based on the borrower and the home. In the early 90s, the Fair, Isaac, and Company (FICO) created a credit scoring system using the three national credit bureaus Trans Union, Equifax, and Experian. Once we had a scoring system, common sense went out the window.
In the current mortgage market, lenders rely heavily on the FICO score to make a determination about a borrower’s creditworthiness. The belief is that the higher the score, the lower the risk that the borrower will default on their loan. Some lenders charge borrowers with low FICO scores a higher interest rate.
Location, Location, Location
The three rules of real estate also apply to lending. Some homes are in rural areas, which may qualify for a low-interest USDA loan. So, location may be a factor in the interest rate charged. Your property may be located in a low-income community, which qualifies for the Home Ready loan program.
Low Down Payment / High Loan-to-Value
In the mortgage business, we refer to the down payment as “having skin in the game.” This refers to the borrower’s commitment to the property. Borrowers who put 20% down are more committed to the property than a borrower who walks in with nothing down and little or no closing costs. Lenders adjust their interest rates based on risk factors. When a borrower has little or no skin in the game, lenders view that as a high-risk loan and price the loan accordingly.
When the borrower pledges a small down payment, it results in a higher loan-to-value ratio. Higher LTVs equals higher interest rates.
The price of the home may have an effect on the interest rate. You may think that if someone can afford an expensive home that they are less likely to default. Well, that may or may not be true, but the lender still has a large sum of money at risk on a jumbo loan, so they are often priced accordingly.
Length of the Loan Term
The longer the lender/investor’s money is tied up, the higher the interest rate. At Secure One Capital we offer 10, 15, 20, 25, and 30 year fixed rate mortgages. The longer the term, the higher the interest rate. The shorter the term of a fixed rate loan, the higher the payment.
We also offer adjustable rate mortgages and hybrid ARMS. Typically adjustable rate mortgages have a one-year fixed period with a rate adjustment every year, so they have the lowest start rate. Hybrid ARMs have varying fixed rate periods, i.e; 3,5, 7 and 10 years and then convert to and adjustable rate mortgage.
Fixed or Adjustable
With an adjustable rate mortgage, the lender shifts the risk to the borrower, so they typically have lower start rates. Although with rates still at historic lows, many borrowers are still opting for the fixed rate option.
We offer many mortgage products from conventional (non-government loans) to FHA and VA loans. Each loan program has its own pricing model, which affects interest rates.
What’s the Rate Today?
There are a lot of factors, which go into a mortgage interest rate. With the 24-hour news cycle and high-speed computers, a news story can throw the markets into disarray at a moment’s notice, which may have a short-term effect on interest rates. As the market shifts and sell-offs or profit taking occurs, we can experience multiple rate changes in a single day. Often the pricing will correct or adjust in the other direction the next day or within a week, but you never know.
Secure One Capital
At Secure One Capital, our motto is “Better Rates, Better Service, a Better Mortgage Experience.” We will work with you to find the right loan program for your mortgage needs. Then we will work to secure the best interest rate available to you.
To learn more about what Secure One Capital can do for you, call today at 877-304-0764 and speak with one of our friendly mortgage bankers or you can apply online. For best results, choose the complete application.
We look forward to serving you.