How are mortgage rates determined? When you buy a home you need to know how much mortgage interest rates today you will have to pay for your monthly mortgage payments. However, understanding how bankers come up with mortgage rates could get a bit confusing.
If you want to pay lower interest rates, you need to find out how are mortgage rates determined and how to profit from this knowledge!
Understanding mortgage rates is important because even a small change in your interest rate amortized over 30 years could save you a ton of money.
How much money you ask?
Let's find out:
This table below will show the principal and interest of a $150,000 loan. The mortgage's terms are for 30 years at 7% interest.
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$997.95 (monthly payment) * 360 months (equals 30 years) = $359,262
That's right, on a loan of $150,000 you paid $209,262 in interest assuming no pre-payment.
Now if your interest rate had been 5%, it would look like this:
$805.23 (monthly payment) * 360 months (equals 30 years) = $289,882.80
On a loan of $150,000 with a 5% interest rate, you paid $139,882.80 in interest. Do you see what just happened?
If your interest rate is two percentage points lower (7 to 5) you will pay $63,379.20 less in interest payments to the bank!
First, you need to understand that mortgage rates forecast are largely dependent on the supply and demand of the market. The demand for money is a
function of economic forces.
The supply of money is largely a function of the Federal Reserve, as it regulates the money supply. The supply and demand relationship sets the
price (or cost) of money.
Although financial institutions approve mortgages they are not responsible for determining what the discount rate will be.
When the Federal Reserve Bank increases or decreases their discount rate, it helps commercial banks determine their prime rate (the rate banks
charge borrowers with the highest credit scores).
The federal discount rate is usually two percentage points below the prime rate.
Another influence on how mortgage rates are determined is treasury bills. These are merely securities that the Unites States Department of the
Lenders (usually foreign countries or major institutional players) invest in these Treasury bills and securities because the rate of interest is
set. It is therefore considered to be the safest fixed income investment because the US government has guaranteed repayment.
Treasury bills establish a base from which market participants measure short-term money cost, including real estate construction loan rates. In
other words, as the treasury bills yield rates rise and fall, so do mortgage rates forecast.
Inflation again is another determining factor when it comes to an increase or decrease in mortgage rates. Inflation occurs when the level of
Inflation tends to increase discount rates because investors (the government and lenders) require higher rates of return to offset the loss of
dollar value due to inflation.
Most lenders will look at a 10-year plan to decide if inflation will rise or decline when they issue loans. This is done to estimate how the value
of the dollar will react with the rise in prices over a period of time.
When lenders get a loan request, they usually calculate the inflation rate over the loan period, this is included in the interest rate. This is done
so that banks continue to maintain purchasing power.
How are mortgage rates determined? The stock market is also in some way related to the increase or decrease in mortgage interest rates today. If
there is no slump in the stock markets and it is doing well, the interest rates also rise because the economy also is doing well.
However if there stock market experiences a major downfall, the rate of interest is also bought down to suit the market conditions.
How are mortgage rates determined? How much you can afford as your monthly payment is also taken into consideration by commercial banks. This
involves your ability to make your payments, your credit score, and your level of debt.
Banks usually look at the level of risk they can endure, since lending to you can be a risk depending on the criteria just stated above.
The amount of down payment you can make is also an important factor that will determine your monthly mortgage rates and payments. Financial
institutions are willing to lower the interest rates if you make a larger down payment.
If the bank receives a larger down payment, they are in a much more comfortable position since the outstanding balance is lower than it could have
been against the value of the home.
How are mortgage rates determined? Most are curious to know what drives the mortgages rates forcast. It is impossible to conclude on a single reason. So again, how are mortgage rates determined? All the factors discussed above, show the rise or fall in how mortgage interest rates today are determined.
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