What Affects Your Mortgage Rate?

My friend Sherrie and I were discussing her plans for refinancing her home, but she seemed to be lost when figuring why mortgages rates where continually fluctuating and what caused them to do so.

If you're in the market to refinance, you need to know what's affecting the varying rates in order to find the best deal and the best time to refinance.

The mortgage industry's three major players are the mortgage originator, the aggregator, and you, the investor.

The originator is the lender and that could be a bank, a credit union, or a mortgage broker. Lenders are in constant competition with each other for your business and the interest rates and fees that are being charged to their costumers determine their profit. In many cases, the lenders do not retain the loan asset; they sell the mortgage you've procured with them into the secondary mortgage market. Thus, your interest rate will fluctuate dependent upon the price the lender's being paid by selling the mortgage into the secondary mortgage market and their profit margin.

The aggregator is the one who has bought your mortgage from the organization in which you've gotten your mortgage. Normally the aggregator is the Federal National Mortgage Association (FNMA), which was created in 1938 in order to establish a secondary market for those mortgages backed by the Federal Housing Administration. The FNMA is now able to buy any mortgage; even those not backed by the government and the mortgages they buy are normally sold to investors on Wall Street as a package of Mortgage-Backed Securities (MBS). The going price for these MBS' determines the price that aggregators are willing to pay to your lender and also the interest rates they present to consumers from their own mortgage originations. Thus, the demand from the investors for MBS' directly affects the price they'll pay for these securities.

Do investors determine my mortgage rate?
–While investors don't directly control your mortgage rate, they do play a role in influencing it. A supply and demand chain influences the entire mortgage market. If there is a higher demand for mortgages and the direct lenders are getting more money from the aggregators and the aggregators are selling more MBS', then the interest rate on your mortgage will be lower than if the lender is having a hard time selling and there is less demand for mortgage investments.

Does the type of mortgage I have affect the rate?
–A mortgage with a fixed interest rate will not change during the lifespan of the mortgage. With 30-year fixed rate mortgages, there is the possibility that the mortgage will be terminated early due to refinancing or moving. This affects the price of an MBS, which is composed of 30-year mortgages, which move, with the price of the U.S. Treasury's five-year note or ten-year bond.

Economic expectations determine the value of U.S. Treasury bonds and the Federal Reserve sets short-term interest rates, which are interpreted to determine long-term interest rates like that of the U.S. Treasury's ten year bond.

Adjustable rate mortgages may change their interest rate monthly, every six months, or annually, dependent upon the terms of your mortgage. This rate is directly tied to an index value plus a margin, giving you the fully indexed interest rate. The index value can continue to change, while the margin is set for the duration of the mortgage. Indexes are correlated with one another and move in the same direction as economic terms change.