Simply put, mortgage rates are the interest rates assigned to a home loan. These rates are actually based on the price of mortgage-backed securities (MBS), which are bonds backed by U.S. mortgages. These rates vary between conventional, FHA, VA, USDA, and jumbo loans – and by mortgage lender.
How Mortgage Rates Are Created
Mortgage rates are “made” based on bonds traded in the mortgage-backed securities (MBS) market. Similar to corporate bonds, mortgage-backed bonds trade all day, every day – and their pricing changes constantly.
In general, as the price of a mortgage-backed bond changes, so do mortgage rates. This is true for conventional mortgages backed by Fannie Mae and Freddie Mac mortgage bonds; and for FHA loans, VA loans and USDA loans, which are backed by Ginnie Mae mortgage bonds.
The price of a mortgage bond is based on supply and demand. All things equal, when Wall Street’s demand for mortgage bonds increases, mortgage bond prices rise, which causes mortgage rates to fall.
A large number of U.S. consumers research mortgage rates every day. Most just want a ballpark figure to help do the math on what buying a home would cost, or to see what a home refinance would look like.
Others need more details on particular mortgage rates – most importantly, when they’re close to making a decision about what to do next.
To everyone, though, getting a good, low rate should be a major focus. A mortgage is not something on which you want to overpay, as paying “too much” for the most valuable asset you own isn’t a great idea!
For an in-depth review of this process, check out Dan Green’s article at The Mortgage Reports for more….
How To Be A Good Mortgage Rate Shopper
Mortgage rates move randomly, and change with little or no advance warning. When you’re shopping for a mortgage, then, it’s important to know the nuances – and also to have a plan.
This means understanding that shopping for a mortgage rate is really about shopping for a mortgage rate and its associated closing costs. You can’t get one without the other.
A mortgage lender should never quote you a rate without telling you the fees that go with it – so pay attention when you get your quotes – because an extremely low rate means nothing if your closing costs are ridiculously high.
There are two ways to shop for mortgage rates, then.
1. You can shop for a particular mortgage rate that you want
2. You can shop for a particular closing cost that you want
Sure, you can try to shop for both at the same time, but why bother? Don’t get caught-up in the game of trying to have it both ways – because you can’t – and here’s why:
When you can isolate a single loan variable for comparison such as “cost” or “mortgage rate”, it’s really easy to know which mortgage lender is giving the best deal.
As an illustration, let’s say you want a rate of 5.00%. That’s your “fixed” variable. All you have to do, now, is to ask mortgage lender for their lowest closing costs, assuming a 5.00% rate.
Whichever lender offers the lowest costs is the lender with the best overall price.
Or, to work it the other way, let’s say you want a zero-closing cost mortgage. In this instance, closing costs are your fixed variable — they’re $0.
To find the best mortgage lender, then, simply ask each lender what the interest rate would be assuming no closing costs whatsoever.
The lender with the lowest rate is the lender you choose, providing they offer the service levels that will allow you to close the transaction on time! If you can’t close on time, that’s more out-of-pocket costs to you, the borrower.
Choosing The Right Lender
The best mortgage lenders will help you understand the complexities and help you choose the right mortgage for your circumstance.
Is it a low payment that you are looking for? Well, then paying a discount point or two will lower that interest rate and reduce your payment.
Are you a little short on cash for closing costs? Well, choosing a higher interest rate can give you that much needed closing credit that can offset some of those costs!
Again, make sure to reach out to the right lender and take the time to outline your current wants and needs.