Mortgage Rates; How & why do they change.

Mortgage rates are mostly defined by the secondary market, where they are bought and sold. The two government agencies whose job is to keep the secondary market stable are Fannie Mae and Freddie Mac.   These two government agencies not only help to establish the current mortgage rates but they also offer a guaranteed price to buy a certain type of mortgage.

Rates change each day based on the market. Mortgage rates most closely follow the 10 Year Treasury bond, but this is not an exact science.  Similar to supply and demand, as bond prices go down, the yield (the rate) goes up. Mortgage rates in the secondary market must then also rise, or all investors would put their money in the bond market, as opposed to mortgages.

As with the stock market, interest rates tend to move up and down. When the economy is strong, rates are higher. When the economy is slower, rates drop.

Rates generally change daily. In fact, rates can change during the day as market conditions change. Normally rates are priced in 1/8th of a point increment, or .125%. Your lender may make the decision to keep their rates more stable than market changes – they may choose to earn business by keeping rates a bit below market.

Generally, all mortgage lenders have access to the same rates. When you shop rates, make sure you compare rates on the same day, at the same time, on the same program, with the same points. Otherwise, you could end up with a rate lower than you could have earned.

Keep in mind your rate is ‘floating’ until you decide to lock it. Once you lock your rate, your lender will provide you with a disclosure showing your rate is locked. At that point, the lender is reserving that money for you and keeping your rate locked in. You are protected if rates go up.

FICO credit score effects mortgage rates

Your FICO credit score ranges from 0 to 850.  Most lenders require scores between 620 to 850 to qualify for a mortgage with 850 being the best.  Each lender sets its own mortgage rates normally based off the national reserve mortgage rates as explained earlier.  These advertised mortgage rates are for excellent credit borrowers.  As an example a lender my offer their best rate for a range of credit score between 760 to 850, then offer higher mortgage rates at different tiers based on the lower credit scores.

Down payment & mortgage rates

One of the largest ways that the amount of down payment that you have available can affect your mortgage rate is by limiting your options. There are thousands of lenders out there on the market and all of them have several different lending programs to choose from. Each one of these programs has special requirements that must be met by the borrower in order to qualify. If you don’t meet the necessary qualifications, you will not be able to apply for this mortgage. This means that if you do not have a certain amount of money to use as a down payment, you will not even be able to apply for some of the best mortgages. Most of these mortgages have some of the lowest rates in the mortgage industry. This means that you will be missing out on these interest rates because you are eliminated before you can even apply.