A common misconception in the financing industry is that mortgage rates are set by lenders or mortgage brokers. In actuality, lenders may choose who is approved for a loan, but mortgage rates are primarily set by the secondary market.
This secondary market includes mortgage investor powerhouses Fannie Mae and Freddie Mac. These agencies purchase the loans produced by lenders and can choose to group them with other loans into mortgage based securities or hold them in their portfolios. If they choose the securities route, the loans can then be sold and traded by Wall Street or investors.
In order to get the best deal possible on a mortgage, it is important to track the constantly changing movement of interest rates and stay up to date on news within the financial industry. Fluctuating interest rates in the secondary market are also an issue when determining mortgage rates. Rates tend to be lower for consumers in poorer economic times because of an increase in investor demand. When the economy is doing well lenders will tend to raise rates due to the demand for higher yields.
Interest rates on a mortgage are determined by a variety of factors. The number of years you wish to finance the loan will play a part, as interest rates are generally higher on a 30-year loan than they would be on a 15-year loan. Fixed-rate mortgages will also have a slightly lower interest rate than adjustable-rate mortgages. The borrower's financial information, including their credit score and the amount they are willing to pay as a down payment, will also play a role in determining their mortgage rate.
Mortgage lenders are free to set their own interest rates, although they are generally based off of how much the Fed charges lending institutions to borrow money. Mortgage purchasers like Freddie Mac may also survey lenders to determine an average interest rate.
