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How Mortgage Loan Rates Are Determined
It is a common misperception by the general public that fixed rate mortgage interest is tied directly to Federal Reserve interest rate movement. On the contrary, the determinant is the performance of mortgage backed securities (MBS), most of which are issued by Ginnie Mae, Fannie Mae and Freddie Mac.

What does that mean in layman's terms? MBS are securities traded on the open stock market and are backed by assets, like real estate. When you obtain a home loan, it is typically sold, pooled into a group of home loans as a securities package called MBS to be sold as securities to investors on the open stock market.

MBS are treated like bonds and are typically long-term, fixed-rate yield investments. Many compare the movement of MBS to that of 10-year Treasury Bonds. The higher the investor demand for MBS, the lower the yield for investors. If the demand for MBS increases, the price for MBS rises, MBS investors earn less yield and mortgage interest rates go down. Conversely, if the demand for MBS decreases, the cost for MBS notes goes down, investors earn more for their investment and mortgage interest rates go up.

On a more granular level, ... more

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