What you need to know about mortgage interest rates!

By
Mortgage and Lending with Finance of America MLS 6621

What you need to know about mortgage interest rates!mortgae interest rates

The mortgage interest rates myth is perpetuated by people (many professionals) that believe the rates are derived from the government's overnight rate or the 10 year Treasury bill. The fact is mortgage interest rates are derived from the mortgage backed securities. The mortgage backed securities are nothing more than bonds secured by mortgages and are traded on the open market much like T-bills.

The T-bills are secured by the federal government which is basically taking a loan from you in exchange for yield (interest rate). In other words, when you buy a T-bill the U.S. government is making a promise to pay back the principle plus the preset interest rate. Seeing how financially strong (at least at this moment) the U.S. government is, it's a pretty secure loan.

On the other side, when you finance your home, the lender that gave you the money to either buy or refinance your home did so with the expectation that you will pay the loan back plus the preset mortgage interest rate. Since you are not as financially strong as the U.S. government, they need additional collateral and put a lien on your home. So, if you don't pay the loan back as agreed they have the right to take your home and sell it to recoup their money or if you refinance, it guarantees they will be paid off first.mortgage

Once the bank made the loan to you and many others like you, they take all those notes and sell them to Fannie Mae or Freddie Mac (both Government Sponsored Enterprises) so they can keep making loans. The banks may or may not keep the servicing rights when selling off. You may think the bank still owns your loan because you get the statements and customer service from them, but it is usually owned by the GSE and the bank is just servicing it for the GSE for a fee.

The GSE will take all those hundreds of loans worth $billions they bought from all the different banks and lenders securitize them (turn them into bonds secured by all those mortgages) and sell them on the open markets as mortgage backed securities the same way the U.S. government sells T-bills. When you buy a mortgaged back security it may be secured by your home, your neighbor's home and so on. The demand for the mortgage backed securities on the open market dictates the mortgage rates.  The more are sold the lower the mortgage interest rates but are traded much like the stocks in flurry of activity every day and that's why the rates fluctuate sometimes several times a day.  

If you would like more detail, please don't hesitate to contact me.  

Comments (2)

John Saari
Worcester, MA
"The Mortgage Buddy"

Great post Ray. I hope Home Savings is treating you well. It's a great company.

Jul 14, 2011 08:45 AM
Ray Waisler
Finance of America - Atlanta, GA
NMLS #6621 - Specializing in Jumbo FHA & VA

John - Thank you. Do you work for a branch or corporate?

Jul 14, 2011 02:09 PM