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How mortgage rates are set on the secondary market!

By
Mortgage and Lending with Eric M Walls

When a bank is setting the benchmark for the rate they take these 4 things into play.

I want to break them down to have you understand, on top of everything else for mortgage rates, what it all means to you the consumer.

Liquidity -- the ability for the bank to turn this back into cash and how quick can it be done.  By cash I'm referring to how fast it can be sold on the secondary market to investors on the pass through and how much it is worth.

Default -- what is the likely hood that you will be late on this loan payment over the course of the loan given prepayment speeds, credit, ability to payback loan, default rates,  etc....  (default rate refers to the number of loans per 100 go bad for each credit bracket; ex.  740+ has 1 or 2 for every hundred miss a payment where a 580 has close to 15 to 19 (just based on my own numbers of loans done in last year no other data to prove and this is just for illustration only))

Maturity -- how long is it going to take you to pay back this loan and can you do it.

Inflation -- this assumes that the $1.00 you invest will be worth less tomorrow; aka the reason that you are charged interest.

Put all this together and excellent credit clients get the best rates because, their loans can be sold faster for more stable or greater profit, they have a low chance of default, shorter terms = better rates, lower interest rate if the risk for all the prior 3 is strong the banks will make there money back.

Finance is simple

Finance = time+money+risk

Keep in mind it's not your time or your money or your risk; it's the risk of the investors money and how long they want to lend it out.