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What drives mortgage rates?

Posted by:  Poli Mortgage Group
2015-10-05 11:35:38

What drives mortgage rates?

Did you ever wonder where mortgage rates come from? Mortgage rates are born from bonds the mortgage-backed securities (MBS) market. Similar to corporate bonds, mortgage-backed bonds trade all day, every day.

In general, as the price of a mortgage-backed bond changes, so will today's rates. The price of a mortgage bond is based on supply and demand. When Wall Street's demand for mortgage bonds increases, all things equal, mortgage bond prices rise which causes mortgage rates to fall.

Mortgage rates move in the opposite direction from mortgage bond prices.

Demand for mortgage bonds can change for a multitude of reasons, the most common of which is risk-avoidance. Because most mortgage-backed bonds are guaranteed by the U.S. government, they're considered "extra safe" and unlikely to default.

During periods of economic or political uncertainty, then, mortgage bonds tend to be in high demand, which leads mortgage interest rates lower.

Also, be aware that rates are subject to "adjustments"; price changes made by the agency securing the bond. The generic name for such adjustments is "loan-level pricing adjustments". Loan-level pricing adjustment are akin to "middleman" fees and they reflect the risk of a insuring a particular loan trait.

For example, mortgage interest rates on a 2-unit property may be higher via Fannie Mae because multi-unit homes are more likely to default than 1-unit homes. The pricing is subject to additional increases for borrowers with low credit scores.


Table based on information from Freddie Mac -




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