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How Interest Rates Are Determined |
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How Real Estate Loan Interest Rates Are Determined
Ever wonder who sets the interest rate for your real estate loan? A common miss held belief is that interest rates on real estate loans are tied to the rate charged by the Federal Reserve. Contrary to this miss held belief, interest rates are determined by the performance of MBS (mortgage backed securities). The majority of MBS today are issued by the major secondary mortgage market players Fannie Mae, Freddie Mac and Ginnie Mae.
How does this affect your interest rate? MBS are securities traded on the open stock market and are backed by assets, like your real estate loan. After you obtain a real estate home loan, it is typically packaged into a group of home loans as a securities package called a MBS to be sold as securities to investors on the open stock market.
The higher the public investor demands for MBS notes, the lower the yield for investors. If the demand for MBS notes increases, the price for MBS rises, MBS investors earn less yield and mortgage interest rates go down. If the public investor demand for MBS notes decreases as it has during the housing crises, the cost for MBS notes goes down, investors earn more for their investment and mortgage interest rates go up. Wait! You say…interest rates have been at historic low not highs, why is that. The reason is the Federal Government has been busy buying up billions of dollars worth of MBS notes over the last year helping to keep the interest rates at historic lows (in an attempt to stimulate the housing industry) and all this is scheduled to end March 31st, 2010. Home Loan Interest Headed Up
Another concern looming in the near future is inflation. Inflation directly impacts interest rates and the direction of MBS notes. Normally as inflation rises, interest rates rise and the demand for MBS declines. Conversely as inflation drops, interest rates decline and the demand for MBS notes increase.
The long and short of it is: When investor demand decreases for MBS notes, mortgage interest rates will rise and as investor demand increases for MBS notes, mortgage interest rates decrease.
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