Mortgage Rates 101 – How your mortgage rate is calculated

Team Simplist
Mortgage Rates 101 – How your mortgage rate is calculated
Oct 29, 2019

Everything you wanted to know about mortgage rates but were afraid to ask.

You probably already know that a mortgage rate is an interest rate — the one that your mortgage lender charges you to borrow money. But how is it determined, who determined it, and how will you know you’re getting a fair shake? Here’s what you need to know:

Uncle Sam has a say.

The federal government influences mortgage rates, and the reason is complex. Fannie Mae and Freddie Mac are not your great-aunt and your neighbor from down the street — in fact, these are the names of two government-sponsored agencies that ensure that lenders have the funds to finance housing.

Here’s the backstory:

Fannie and Freddie (again, with the backing of our government) buy home loans from lenders and sell them to investors who are looking to make a profit.

The lender now has cash on-hand to make more loans to even more people.

Fannie and Freddie sell bundles of mortgages to investors looking to make a profit. These bundled loans (known in the business as mortgage-backed securities, or MBS’s) are sold to secondary mortgage market investors, which creates more market liquidity and can help keep interest rates down.

Depending on various economic factors (the stock market, foreign markets, inflation, etc.), which determine the likelihood that loan balances and interest will indeed be repaid in full, investors purchase loan bundles at different interest rates. Those rates, in turn, influence the rate that lenders can charge you for your mortgage.

Another thing determining the interest you pay on your home loan is competition between investments. The yield on 10-year U.S. treasury bonds is typically considered to be the most reliable bellwether of mortgage interest rates, although you might be forgiven for assuming that a 30-year fixed mortgage would be comparable to a 30-year treasury note. However, most borrowers tend to refinance their mortgage (yep, we can help with that) or sell their home before the initial 10-year period is up.

If the 10-year treasury yield is low, it suggests people are seeking safer assets and subsequently buying more bonds, including mortgage bonds. When it’s higher, people are buying fewer bonds, which tends to mean – yep, you guessed it – higher mortgage rates.

All that aside, there are still more factors that determine what kind of interest rates you’ll be offered for your mortgage.

Your personal credit matters.

Fannie, Freddie, and Sam notwithstanding, your personal creditworthiness will still affect the rates you’re offered by lenders. A healthy credit report indicates that you will likely make all of your mortgage payments, meaning the lender will make money. They like that, and they will offer you a lower mortgage rate than someone who may stop making payments before the loan is paid.

Lenders also want to know that you have enough income to make payments when they’re considering what kind of rate to offer. Luckily, Simplist streamlines this process by showing lenders all your income without piles of paper. No W2 used to mean higher mortgage rates for you — not anymore.

Do your shopping and choose your points.

Lenders are as individual as you are, and shopping around can help identify considerable savings in rates. Of course, Simplist does the leg work on this one, conveniently showing you all your offers in one place.

Keep in mind that you have the option to lower your rate by purchasing discount points at closing — also known as buying down the rate. Discount points are upfront fees that you pay directly to the lender at closing in exchange for a lower rate, with each point representing 1% of the total loan balance. Consider it like prepaid interest — the more you pay upfront, the less you pay down the line. Got it?

Now, get out there and live your best life, get your best rate, and impress your friends and family by telling them what you learned today.

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