How Mortgage Rates are Determined
How do lenders set mortgage rates?
In the broadest sense, lenders don’t control interest rates. Like almost all prices in a free market economy, mortgage interest rates are determined by the market. It’s a complex process, but in the case of mortgages, the market is made of investors who buy and trade mortgage-backed securities, just like other securities and bonds. These investors are called the “secondary market” in the mortgage industry. Interest rates tend to rise and fall based on demand in the secondary market.
If that’s true, why don’t all lenders offer the same rates?
An interest rate is the basic price of a mortgage (the price the lender charges you to borrow money). This basic price depends on market conditions, but the lender also prices mortgages on a borrower-by-borrower basis depending on risk factors such as how much you are borrowing, how much of a credit risk the lender perceives you to be, whether you are applying for a fixed- or adjustable-rate mortgage. And, just like retail stores, lenders also adjust mortgage rates based on competition with each other and their own costs.
So I should go with the lender advertising the lowest rates?
Not necessarily. Mortgage rates change daily and are based on each individual application, so advertised rates have to be based on a lot of assumptions. And to get your attention, lenders typically use the most favorable assumptions they can: excellent credit and an average loan amount.
Sounds complicated. Can’t I just pick any old lender and be done with it?
You could, but you wouldn’t be doing yourself any favors. The only way to ensure that you are getting a fair deal is to inform yourself on national averages and then compare rates and loan offers from different lenders based on your specific situation. Get started by filling out our easy 2-minute form and get matched with up to five lenders.
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