Those considering buying a home are always interested in interest rates because this will affect the total price of the home and the monthly mortgage payment. Mortgage rates change quite frequently, going up and down on a regular basis. Homebuyers should follow mortgage interest rates and buy when mortgage rates are down. It's difficult to understand what affects mortgage interest rates and why they fluctuate. Nevertheless, it is important to have a good understanding of mortgage rate basics.

The Basics

The lender of mortgage rates is the originator of the loan and this is most frequently a financial institution of some type. When a mortgage is approved and funded the borrower, you, are given the money. Then, you turnaround and pay the seller of the home the money. What is leftover is your mortgage, what you owe the bank.

Interestingly, the financial institution that funded your mortgage is not stuck with it. They may choose to keep it or sell it. When the originator of the loan keeps it in their portfolio the money you pay each month pays for the interest on the loan and the bank makes money this way. If they sell the loan, then they have more funds in their control to make more loans with. It may not seem like it, but this buying and selling of mortgages affect mortgage interest rates.

Who Affects Mortgage Interest Rates?

Many people have heard a lot about Fannie Mae and Freddie Mac recently. They are government-chartered companies that may buy up mortgages as secondary market investors. Their good business practices or lack thereof, trickles over into the overall market and affects interest rates. Pension funds, securities dealers, and even insurance companies are part of the secondary market and able to buy up mortgages. These investments are liquid and are bought and sold quickly and easily, in most cases.

Now, the details of how the secondary market will affect you as a potential homebuyer. The investors in the secondary market want to make as much money on their investment as they can, which is why they are in business in the first place. The amount of return on their investment is completely dependent on the status of the economy and the perceived status of the future of the economy. When the economy is doing extremely well then returns in the future are anticipated to be higher than current returns. When this happens most investors choose to wait until the higher yields exist to make purchase. When this happens mortgage rates increase because lenders are unable to sell their loans for lower returns.

When the economy is not doing well, even in a recession, investors are anxious to buy the loans that are available to avoid the loans that are available with lower yields in the future. Since investors are trying to buy everything before yields drop, interest rates go down. This is the time when potential homeowners want to buy a home because it can save you thousands of dollars over the life of your loan.

- Toronto Mortgage Rates