How mortgage rates work
Updated: Apr 15, 2021
A common question that people have is what is my rate going to be? Beyond the things that you might think about like credit score, loan type, loan amount, down payment, and property type. There are a lot of other different factors that go into how the rate is generated.
Mortgage backed securities are basically a collection of mortgages that are packaged together as a security, which is a bond, and then bought and sold daily. Then that's what keeps the flow of money going around in the mortgage industry.
What you can see from a general chart of mortgage backed securities is that there's actually an inverse relationship. As the market goes up, then you'll see rates go down, and vice versa. It's helpful to understand that rates can change during the day, even based on the volatility of those mortgage backed securities. One way that that affects rates is let's say that you have a longer closing time you're closing in 60 days, we have to lock your rate for a longer time. That means that your rate is basically exposed to the market for a longer time. There's a higher risk, because, within those 60 days, they're going to be market fluctuations within the mortgage backed security.
It might cost you a little bit more, your closing cost might be higher, or your rate might be a little bit higher to lock for, say 60 days. Then if you lock for a shorter period, like 30 days, there are multiple factors that affect the MBS market, big influencers can be how's the economy doing? How is inflation, because both of those affect how attractive those mortgage bonds will be to investors, how much they will be sold, how in demand they are, and then how that then impacts the price, which ultimately impacts rate, what also impacts that is going to be individual lenders appetite for a certain loan type loan amount. And that means that they will then price rates either very aggressively in order to capture that business, or those terms might not be as favorable where that impacts you is which of those buckets does your loan fit into.
There are also industry guidelines that affect what a rate may be for a particular loan type or a particular property type. For example, investment rates are almost always going to be higher than a primary home because they're considered a little bit riskier. Federal agencies like Fannie Mae and Freddie Mac tell us that they want those rates to be priced higher because they are riskier, and as a result, lenders will have a higher rate on those loan products to make sure that essentially the profit that Fannie Mae and Freddie Mac want to make on that loan has been covered through the rate.
The last thing that's very impactful to rates is going to be fees. How much in lender fees are you paying? And that can look like things like origination charges, underwriting fees, discount points, all of that. Keep in mind that when you are shopping your rate is more than just the rate it is also what does that rate cost you both in upfront closing costs? But then also over time, part of what I love about what I do is coming up with the right solution to help you meet your goals.
If you have a question about what the right strategy might be for you, please reach out to me because I'd love to have a conversation about it.