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How Are Mortgage Rates Determined In Today’s Market?

By Eric Goodwill

Mortgage rates can get a little rough, and after a few stiff payments, it could leave you wondering how rates are determined, and if it’s anything personal against you. Of course, interest rates on loans are simply in place according to the amount of the loan, the state of the economy, your credit history, and maybe a few other factors, but mortgage rates are a whole different ballgame. There are actually several factors that play into determining rates.

Inflation

Inflation is sort of a big player on the decision of what the mortgage rates will be. Steady and consistent inflation is not considered good news for lenders because the money that people are borrowing will be ultimately worth less when it’s paid back. If economists are predicting a rise in inflation, the investors will be firm about setting higher rates. This is to protect themselves against the effects of inflation. There are other factors that lenders use to protect themselves, and this is called “Default Risk Premiums,” but those will be covered in a minute.

Investors’ Other Investments

Investors can practically invest their money wherever they would like, and since there are so many choices, the competition for the other investments is also a big determiner of the level of rates.

The Federal Reserve

When the Federal Reserve makes the decision to adjust interest rates (mainly the federal funds rate), this has a roundabout effect on mortgage rates across the board.

Default Risk Premiums

This is basically a factor of a mortgage rate that is set in place for the mere possibility of the borrower not paying the money back. This is essentially protection for the lender, and it is basically the price of borrowing money since, after all, you did start out with nothing.

Related posts:

1. How Are Home Mortgage Rates Determined?
2. How Quickly Will Mortgage Rates Rise?
3. How Does The Bond Market Affect Mortgage Rates?
4. How Are Commercial Interest Rates Determined?
5. What Causes Mortgage Rates To Change?