You might wonder who is responsible for the daily adjustments to mortgage rates and where they come from. There is a method. Lenders do not just set rates at random. You might also wonder why mortgage lenders A to Z all offer interest rates that are very similar, if they are not identical. Do they all decide in a Zoom meeting?
A lender can set rates of interest based on several factors. The rates for a rental home will be slightly higher than those of a home that is owned by the owner. Shorter term loans may have lower rates than a longer term loan. Rates may even be adjusted based on the amount of equity or down payment in the property. Credit scores are also a factor. Almost all lenders follow this guideline.
Why are rates almost the same everywhere, with only minor variations? They all use the same index to set rates.
No, they are not based on Treasury bills or bonds, although this is a common misconception. Close, though. Fixed rate loans are a type of bond. Lenders instead look at the price of a specific mortgage-backed security, or MBS. An MBS is a bond with a fixed return rate. Just like any other bond the yield (return), when the price of that bond increases, will also decrease.
In general, when investors choose between a bond or a stock, a bond provides security. A particular stock may offer a higher return. Investors know how much they will receive, and when. Investors have historically withdrawn money from bonds when the economy is doing well. A lower demand for bonds will result in a lower bond price. The method is pretty similar for mortgage-backed securities.
The rate of inflation is another factor that can lead to higher mortgage rates. As the Fed seeks to cool an overheated economy, higher rates will usually result from higher inflation. Or, as it is now, the price of commodities and consumer goods may also rise. We are currently in this cycle. While the Fed remained steadfast at their last round, they have indicated that they will be ready for the next round. It’s possible that the Fed has already planned another rate hike. We’ll see. But the betting money is on another Fed hike at their next meeting in a few week.