How are Current Mortgage Rates Determined?
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- By Jennifer Calonia
- December 2, 2012
Locking in low mortgage rates is more than the luck of the draw. There are many components that contribute to how mortgage lenders gauge the rate range they offer to borrowers.
Here are three major influencers of mortgage rates today.
#1. Supply and Demand
Like any business, the issue of supply and demand must be assessed in order to determine what to charge customers for a service. In the case of mortgages, the mortgage crisis of 2008 sent demand for mortgage loans plummeting as supply shot through the roof. The ample number of mortgage lending options in the market and a disinterest in home financing resulted in current mortgage rates dropping to historic lows.
#2. Fed’s Regulation D
The banking operates in a single, large loop when it comes to the way interest rates are determined. The Federal Reserve sets certain requirements for all financial institutions with regard to how much money they must have on deposit.
Banks who do not have enough funds to meet the Fed’s Regulation D requirement, can choose to borrow the cash from other financial institutions or the Federal Reserve itself. However, as with all loans, this borrowing comes at a cost. The borrowing institution must pay interest on the loan while still generating a profit, so consumer mortgage rates are increased as a result.
#3. Likelihood of Default
In addition to the aforementioned factors that drive mortgage rates today up or down, borrowers’ credit histories play a significant role in the rate range they can expect to receive upon submitting a mortgage application.
Even if current mortgage rates are at an all-time low, borrowers who have a less than stellar credit history, and especially those without a substantial amount of equity or down payment to allot to the loan, will likely qualify for higher mortgage rates.
When lenders review a borrower’s creditworthiness, they are essentially making a judgement call as to whether the applicant is a high-risk for default. Lending money to an individual with a track record for making late payments or who doesn’t have any credit history to speak of leaves mortgage lenders with an immense level of uncertainty as to whether they’ll even get their money back.
As a result, mortgage providers will often increase mortgage rates to expedite the return of their money, to reduce their chances of loss in the long-term.
Despite these factors, borrowers who have diligently worked toward maintain a strong credit history can still accomplish their dream of owning a home by taking advantage of mortgage rates today, while they’re still incredibly affordable.