Who Decides What Mortgage Interest Rates Are?

Who Decides What Mortgage Interest Rates Are?

You're thinking of refinancing your home in order to pull out some cash and buy an investment property. Naturally, you call the guy you figure knows the most about mortgage financing (me), and learn that the rate today on the refinance will be 6.25, and the rate on the investment property will be 7.0%. These aren't as low as the rates you heard quoted on the radio ad, so you wait three days until you hear the ad again, get the number and call them, only to learn that the rates they can actually get you are higher than what I quoted you (hopefully you learn this before closing your loan with them). You know that I, nor they, are lending you our own money, so you wonder who says that's the rate?

The answer is, ultimately, the bond market.

The interest rate on thirty-year mortgage loans generally goes up and down based on what the 10 year treasury note does. This is because the average mortgage loan is only open about eight years before it is paid off or refinanced, so lenders/investors calculate what they can get for guaranteed, insured returns for a comparable time period and price mortgage loans roughly in relation to those bonds, with a premium built in as a reward for the risk and to allow for defaults. Generally that premium is 2 to 3%, although many different market forces can influence this premium one way or another at any given time.

This is why you should be especially wary when you hear a great interest rate offered by someone; all mortgage money ultimately comes from the same place, so that special offer you hear about probably has a catch, and it may be a very expensive one.

Carl Trawick is a Mortgage Specialist and Licensed Mortgage Broker with the firm Access e*Mortgage. He can be reached at 904-343-1145 or ctrawick@nefcom.net