How Are Mortgage Rates Determined?

Whether it’s investing in your future through school, purchasing a car, or deciding to opt for home ownership, these types of sizeable purchases generally require a loan—but while you may assume you’re the only one taking a risk, it’s important to remember that the lender is actually taking a chance on you as well.

Therefore, when it comes to interest rates, their determination is generally made through considering the cost of borrowing money, along with the price of insurance for the lender. As the risk increases, so too, does the cost of borrowing; however, a higher interest rate isn’t necessarily indicative of your personal situation. In short, while a lender is obviously taking a risk on you, they are also taking a risk on the state of the economy as a whole—at the end of the day, your stellar credit rating won’t protect you from brutal dips in the marketplace.

Still, mortgage rates tend to be a bit more complex because there isn’t a single institution who determines what your mortgage rate will be. Ultimately, there are a multitude of factors that come into play, including the rate of inflation, the price of U.S. treasuries, and the Federal Reserve. In short, all of these items affect how much investors are willing to pay to invest in mortgage-backed securities (MSBs), which is truly determined by institutional investors looking for a return on your mortgage payments.

In the end, the situation can be somewhat challenging to understand, especially if you’re a first-time home buyer. Therefore, if you have questions, I’ve got answers—I’d love to hear from you!

Pam Wright | OnQ Financial | www.onqfinancial.com | 404-445-1033

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