Does the interest rate determine the rate of the mortgage? Learn how the interest rate affects your home mortgage. "In the big picture, as far as mortgage rates in general, the bond market determines the...
"In the big picture, as far as mortgage rates in general, the bond market determines the interest rates traditionally for fixed rates. It is the yield on the tenure. If you notice when the yield on goes up, you will also notice that the interest rate goes down, and vice versa," says Stephen Edwards of Waterfield Financial Company, the nation's largest privately owned mortgage company.
Additionally, other factors influence the interest rate that a consumer acquires with a mortgage loan. Edwards states, "At a loan level, a borrower's credit history can further determine interest rates. If somebody has bad credit, a mainstream vendor, like Waterfield, may have a product that will give somebody with "bad credit" a chance to get a mortgage. However, it will change the rate."
A borrower with a history of bad credit receives higher interest rates, in general, on all loans, including mortgage loans. Sub-prime lenders, lenders who cater to the needs of individuals with bad credit histories, charge even higher rates of interest for their loans in general.
Furthermore, the term, or number of years that the mortgage loan will be held, also influences the interest rate that is charged. The type of loan, fixed-rate, adjustable, balloon, or interest-only, influences the interest rate that is charged as well. Some lenders will even allow a borrower to purchase a lower rate of interest through the payment of additional points on the mortgage balance.
"In general, mortgage rates are not impacted by the movement of the Federal Reserve," states Edwards. "A lot of times when the Federal Reserve meets, they adjust the interest rate. Some people think 'oh it is going up' or 'oh it is going down.' What really happens is that the Federal Reserve changes the federal funds rates."
Edwards explains, "That is the rate step that lenders charge one another on short term loans. This is what impacts the consumer by affecting rates on car loans, credit cards, and things that are shorter term financing." Since mortgage loans are long term loans rather than short-term loans, they are not directly influenced by the decision of the Federal Reserve.
"That being said, there can be a residual economic effect of the Fed's actions. This in turn can affect the bond market, and thus it may affect the mortgage rates," explains Edwards. Therefore, an indirect result may be felt by the mortgage market, depending upon changes in the bond market due to the Federal Reserve's rate changes.
Specifically, a hike in the Federal Reserve rates eventually filters over into the bond market. This may transfer into a hike in the rates charged for mortgages. Occasionally, when a cycle of hikes in the Federal Reserve rates is nearing an end, the bond market again fluctuates. In turn, the rates for mortgages may experience a spiral upward again.
"But in general, what the Federal Reserve does to interest rates does not directly impact the mortgage rates." Edwards sums it up, "So on big scheme of things, it is the bond market that determines the interest rates. In a smaller micro-environment, it is the borrower's credit history that can further determine the interest rate."
