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How Are Mortgage Rates Determined?

how-are-mortgage-rates-determined

At the root of mortgage rates, educated consumers will find the ten-year Treasury bond. If you watch the trend of this type of investment product you will see that it is directly correlated to the interest rates being offered on standard traditional 30 years fixed rate mortgage programs. The reason for this trend is that most mortgages are either paid off or refinanced in ten years. Therefore, since mortgages are backed by investments like treasury bonds, the bond rate indicates how much money lenders will make or lose on a loan.

How Can a Consumer Predict Mortgage Rates?

By taking the bond rate of a ten-year treasury bond and adding the industry standard of 1.7%, most consumers will be able to predict interest rates on mortgages. If the rate on the bond drops, so does the standard mortgage rate. It’s not foolproof, but is it definitely a fairly accurate prediction tool.

Are There Other Factors Involved?

Yes. Mortgage rates depend on the number of buyers seeking mortgage loans at any given time. If there is a sudden flood of buyers, mortgage rates tend to drop in order to make loan programs competitive. In most cases, the lower the interest rate, the more attractive a loan will be to consumers. Obviously, adjustable rate mortgages are attractive for this reason. Unfortunately, many consumers don’t pay enough attention to bond trends and the market and don’t understand just how much a rate can adjust upward. This can make an ARM payment beyond what a borrower can afford after a few short years of lower payments and interest than they would have with a fixed rate program.

Does Consumer Confidence Play a Part?

Yes, consumer confidence can greatly affect mortgage rates. If consumers are not buying homes, rates will go up. The few buyers who are looking for a mortgage will be willing to pay more. Economic struggles can drive rates upward as well, because the fewer loans a lender has out with consumers, the less money they will make. They raise rates in order to stay in business.

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