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Here Today, Gone Tomorrow: The Inside Look At Mortgage Rates

by Kristi  Shibata
Mortgage Directory Columnist

Whether you are refinancing or looking for a new mortgage, the one constant driving force behind all mortgage plans is the interest rate. When interest rates are low, buyers are quick to take advantage. When shopping around for a new mortgage plan, one looks for a lender that offers the best rates. It is clear that the interest rate is an integral part of the mortgage process, but what determines these rates? As a homeowner and borrower, you should have an understanding of how the market works so you can make an educated decision when financing your home.

The Truth behind Your Mortgage Rate

One of the biggest myths about mortgage rates is that the Federal Reserve Board controls the rates. Although the board does have it owns Federal Funded rates, there are many influential factors that go into the one number that matters the most to your mortgage.

The mortgage market is like any other--when demand is high, prices rise. In uncertain times, investors may exchange stock for bonds in their flight to safety. The increase in demand pushes bond prices up and interest rates down. Similarly, high demand for mortgages means lenders can charge more, pushing interest rates up. The market works to serve two different clients: the investors seeking assets that will bring them a higher return and the homebuyers looking for a low rate at which to borrow. So the rates are continuously changing as the market balances supply and demand.

What the Numbers Mean to Your Mortgage

When the rates are low, the total volume of refinance mortgages increases, overwhelming the investors. In this case, there is too much demand for funds and not enough supply. Something needs to change to attract those investors to support mortgages, so interest rates typically go up. This is one factor that influences the rise and fall of mortgage interest rates.

Lock-In Rates When Refinancing

When rates dip you might consider locking your loan, especially if a small rate increase would disqualify you from getting approved for your mortgage. Otherwise, you can let your rate float in hopes that it might come down further during the processing of your mortgage. It depends on your finances and your tolerance for risk.

No one can predict what is going to happen in the marketplace or what the rates are going to be next week. But when you are shopping around for your next mortgage, you will know how your mortgage rate is determined.

Sources: About the Author
Kristi Shibata is a public relations and communication specialist and regular Mortgage Directory columnist. She graduated from University of California, San Diego, with a BA in Communications.

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