Have you ever wondered how lenders decide on the rates they use? You don't have to guess anymore, because I'm going to tell you. We all answer to the secondary market, which has the power to raise mortgage rates. Fannie Mae, Freddie Mac, and other mortgage lenders do business on the secondary market. These agencies, which were started by the government, buy the loans that lenders make and either keep them in their portfolios or put them together with other loans to make mortgage-backed securities. Then, these securities are sold to mutual funds, Wall Street firms, and other financial investors, who trade them in the same way they trade other securities and bonds.
Because of this, investors set the rates instead of mortgage brokers and bankers. When news about the economy shows that things are getting better, investors ask lenders for higher returns. This is because they don't want to buy low-yield bonds right now in case the Fed raises rates to slow down the economy, which would mean they would have to make higher-yield bonds later. In this situation, the only way for lenders to sell their loans is to raise the returns they offer investors. In turn, this means that the rates for consumers will go up.
When it looks like the economy is slowing down, the same thing happens backwards. Investors start buying bonds like crazy because they think the Fed will have to lower interest rates in the future to get the economy moving again. If the investors wait, the bonds they buy will pay out less. Investors want loans a lot, so lenders who control the amount of loans can offer lower yields. The result is that the rate consumers pay goes down.
Consumers should really pay attention to financial news if they want to get the best rates out there. It can also be very helpful to talk to a mortgage lender or broker. Most of the time, the mortgage broker will know a lot about the economy and be up to date on it.
